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The Week Of Financial Crisis

Now that it’s Monday morning, when I look back at the financial chaos that took place last week, one term in particular comes to mind…

“Hell in a handbasket”

And Dr. Prieur du Plessis, the chairman and principal holder of South African-based Plexus Asset Management, best summed up the week of financial crisis in Market Oracle (UK) yesterday when he wrote:

Whew – what a wild week! Global stock markets and commodities tumbled, whereas government bonds and the US dollar surged amid mounting fears that the ongoing turmoil in financial markets was foreshadowing a hard landing for the US and Europe.

The first-ever trillion-dollar loss (as measured by the Dow Jones Willshire 5000 Index) on Wall Street came on Monday in the wake of the US House of Representatives failing to gather enough votes to pass the $700 billion bank rescue package. Globally, more than $1.7 trillion got wiped off the MSCI World Index.

Considering the entire history of the Dow Jones Industrial Average since 1896, Monday’s decline of 777 points ranked as the largest points decline in history (see post “Fear Grips Global Markets”). However, and let’s be thankful for small mercies, the percentage decrease of 6.98% was still significantly less than 1987’s 22.61% decline.

Although the Senate’s passing of the bailout plan on Wednesday brought temporary relief, the reversal on Friday of the House’s earlier decision brought more volatility. In classic “buy on the rumor, sell on the news” fashion, the Dow Jones Industrial Index rallied by 3.0% leading up to the vote, but then sold off by a massive 486 points (4.5%) to end 1.5% down on the day and 7.3% lower on the week.

Already, this week is off to a bang-up start. As I type this, the Dow is off over 400 points this morning, while in Europe, the pan-European Dow Jones Stoxx 600 index posted its biggest one-day percentage loss ever on Monday (according to preliminary data). The index fell 7.6% to 241.57, surpassing the 6.21% fall recorded back on September 11, 2001.

Source:

“Fear Grips Stock Markets as Economies Tip Into Recession”
Prieur du Plessis
Market Oracle (UK), October 5, 2008

Quotes For The Week

A hat-trick of quotations for you…

The rejection of the package is good because it shows that some people in the U.S. are still sane. A bailout will not buy the U.S. a way out. The government is less powerful than markets in fixing this mess.

-Marc Faber, in a September 30 phone interview with Bloomberg

Sometimes I think we need to put out an ad: “No, we don’t have any more jobs than you do.”

-Jodi Royal-Goodwin, the redevelopment agency director for Reno, Nevada, in response to an influx of homeless people coming to the city looking for jobs

Altogether, we have had eight years of no gains in real median wages, flat stock market returns, and minimal net new jobs. Despite what you have heard, after adjusting for debt spending, population growth and realistic adjustments to the GDP deflator, there have only been 3 or 4 quarters of GDP growth since 2005. If you adjust for military, government and minimum wage positions – i.e. jobs funded by tax payers and jobs that don’t pay anything - there have been absolutely no net new jobs. Bush’s largest gains have been with inflation, oil and food prices, debt, trade deficits, bankruptcies, foreclosures, and healthcare costs. If an assembly of the world’s leading economic strategists were to design the most destructive economic disaster possible, they could not match the results of Bush’s tenure. Even the most loyal Bush supporters will admit he has been an absolute disaster – that is if they’re being honest.

-Mike Stathis, Managing Principal of Apex Venture Advisors and author of America’s Financial Apocalypse, in a Market Orackle (UK) piece from September 14

Growing Threat For Gas Shortages

Have you heard about the gas shortages in the Southeast? It doesn’t seem to be getting a lot of coverage in the Chicagoland area. However, the other night I was driving down some rural road outside of Burlington, Wisconsin, when a story came on the radio about some Atlanta woman who set her alarm clock for 2:30 AM in the morning just so she could get to a gas station and avoid any lines. No such luck. Even in those wee small hours of the morning, this motorist had to wait almost half-an-hour before she could access a pump. So, what exactly is going on here, and is there any danger of it spreading to other regions of the United States? CNN Money’s Brian O’Keefe talked about the situation last week and wrote:

The immediate answer is that the double whammy of Hurricanes Gustav and Ike, which swept through the Gulf of Mexico earlier this month, caused much of the Gulf’s oil drilling and refinery production to be shut down. In particular Ike, which hit refinery-rich Southeastern Texas on Sept. 13, caused massive power outages in the Galveston and Houston areas.

As of this week, more than a dozen refineries around Texas City and Port Arthur were not operating at full capacity and, according to the Department of Energy, six refineries, with a combined capacity of 1.6 million barrels a day, were still not running at all.

As I suspected, there’s more to this story. O’Keefe added:

But while the current shortages can be traced directly to the two hurricanes, the severity of the problem points out a bigger issue: The U.S. has been operating for a while with razor-thin spare gasoline capacity.

In its most recent Weekly Oil Data Review, Barclays Capital pointed out that the U.S. gasoline inventory has reached its lowest level since August 1967, when demand was a little more than half its current level of 9.3 million barrels a day. At 178.7 million barrels, inventories are 21.6 million barrels below their five-year average.

The CNN Money senior editor recently spoke to Matt Simmons, the chairman of Houston energy industry investment bank Simmons & Co. and chief spokesman for the Peak Oil movement, who said of the situation:

Our system is so fragile, all you need is a tiny change to go from ‘Oh, we’re in fine shape’ to an unmitigated disaster.

Simmons also warned:

If we end up having gasoline shortages, the odds are about 90% that Americans will do what we always do: We’ll top up our tanks. And in topping up our tanks, within three or four days we’ll drain the pool dry and then within seven days we’ll run out of food.

To which O’Keefe remarked:

That sounds awfully dire. And it probably won’t happen. But, then again, a couple of months ago hardly anybody would have predicted that AIG would collapse, Congress would be mulling a Wall Street bailout, and ‘70s-era gas lines would be back.

Good points.

Source:

“Gas shortages: get ready for more”
Brian O’Keefe
CNN Money, September 27, 2008

Why Gold Will Prevail

This afternoon, I listened to the most recent broadcast of the “Financial Sense Newshour” when guest John Williams of “Shadow Government Statistics” fame made the following statement about the recent activity surrounding gold:

I can’t prove that intervention took place in the gold market. But you sure can make a very strong circumstantial evidence case for it, especially considering that the system was on the brink and they were trying to contain the panic. One way to do it is to discourage the owning of gold. And that’s been a traditional sore point for central banks and governments over time. It’s usually when gold is soaring it’s a good sign that they’ve been doing a bad job. And I think a lot of what happened with that, not only the selling of the gold, but the buying of the dollar, was very much orchestrated, very much supported with heavy intervention. Again, the underlying fundamentals haven’t change a bit. If anything, they’ve gotten worse. And the fundamentals for the dollar couldn’t be more negative. And the fundamentals for gold couldn’t be more positive. And those fundamentals, will in the end, dominate the markets. And, irrespective of whatever intervention, games-playing, jawboning, whatever’s done, in the end the gold price will prevail on the upside. And, unfortunately, for most of us living in the United States, the dollar is going to come under very heavy selling pressure.

Source:

“Other Voices with John Williams, Shadow Government Statistics”
Third Hour
Financial Sense Newshour, September 20, 2008

———

FREE 5-MINUTE VIDEO FOR GOLD TRADERS:
“Where gold is headed in the next 6 months”

Gold: An Excellent Primer On The Yellow Metal

From MarketWatch this afternoon:

Crisis sparks new gold rush

Gold futures closed up $70 an ounce on Wednesday, the biggest daily gain in dollar terms since at least 1980, as news of the U.S. government’s takeover of the biggest U.S. insurance company fueled massive safe-haven buying.

Gold for December delivery jumped $70, or 9% to end at 850.50 an ounce on the Comex division of the New York Mercantile Exchange. This would represent gold’s biggest one-day jump in dollar terms since at least 1980, the earliest year historical data were available on the Comex. Gold started futures trading in the U.S. in 1974.

After market closed, gold continued to rise more than $20 to $870.90 an ounce in electronic trading.

Wow. When gold shines, it REALLY shines.

I’ve written a few posts about the “barbarous relic” in the past, including:

“Gold: Barbarous Relic Or Investment Superstar?” Parts One, Two, and Three
“Gold, Unloved”
“Gold: Not So Precious?” Parts One, Two, and Three

However, just last week I came across an informative piece on the yellow metal by MSN Money’s Darrell Delamaide. Delamaide begins “Why does gold matter?” with:

The precious metal’s price has been lackluster in the long term, but when people get nervous about the world’s economies and weak currencies, gold becomes a hot haven. Also: 2 ways to get in on the action.

I found the article to be a pretty good primer on gold, and up-to-date as well (published September 11).

Notwithstanding today’s explosive price action, that is.

You can access the article here.

(Note: The author disclaims any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein.)

Sources:

“Gold ends up $70 as investors flee financial turmoil”
Nick Godt, Moming Zhou
MarketWatch, September 17, 2008

“Why does gold matter?”
Darrell Delamaide
MSN Money, September 11, 2008

World’s Highest Paid Investment Adviser: U.S. Faces Hyperinflation Or Depression

I don’t think I’ve ever mentioned this, but I am extremely grateful to Peter Brimelow over at MarketWatch. Without his column, I wouldn’t have access to the insights of Harry Schultz, the highest paid investment consultant in the world. For those readers not familiar with Mr. Schultz, I talked about him back on December 13. From that post:

Have you ever heard of Harry Schultz? I sure have, and to this day I am still in absolute awe of the money this man earns. Mr. Schultz, publisher of the International Harry Schultz Letter, is the highest paid investment consultant in the world at $3,500 an hour (or $4,900 an hour if you require his services during the weekend).

Brimelow talked about Schultz’ latest U.S. economic forecast this past Monday on MarketWatch. He wrote:

Harry Schultz’ The International Harry Schultz Letter was posted last night right about the time the Fannie Mae-Freddie Mac bailout was reported. But Schultz anticipated it, writing sarcastically:

“Flash: As we go to press, the US Government reveals plan to take over Freddie Mac and Fannie Mae, the biggest bail-out by taxpayers in history. It also wipes out the shareholders! Sunday selected to avoid stock market action same day, just as bank closures are told after market close Friday. That tells you what shape markets are in when government and CEOs hide behind holidays.”

Schultz had earlier made his overview clear (I’m translating slightly from of his text-message style):

“Fed maneuver room approximately gone. Any $US injection big enough to avert a depression triggers runaway inflation. If not big enough: depression. US on knife-edge. Gold helps you either way.”

This apocalyptic vision is consistent with his earlier predictions, such as one I discussed in a February 18 post. Brimelow stated back then:

Schultz writes: “It’s a derivative crisis, stupid!… 9,000 U.S. banks failed in 1929-1932; look for new records… Hyper-inflation is a distinct possibility; stay awake!”

Among his more colorful recommendations: “Buy a few local non-rare gold coins of whatever country you are in for emergency/barter use, smallest denominations… Keep 6-12 months cash at home/office/ lawyer-doctor office. Pretend an emergency is coming, because it may be.”

…and from that December 13 post:

Among other interesting ideas raised by Schultz in his intense, somewhat terrifying introduction: recession, possibly depression; bank failures; exchange controls; housing prices down by 50%; credit card company failures; money market fund dangers; tripling of U.S. jobless numbers; federal bail-outs for Fannie Mae.

Note the bailout prediction for Fannie Mae.

Fast forward to Schultz’s latest forecast. Brimelow wrote:

Schultz suggests just two alternative scenarios, both equally appalling:

“If Bush bails them all out, the die would be cast for inflation unseen in the West since 1923 Germany. If no bail: Hello, 1929.”

Gee, thanks.

Brimelow talked about what Schultz thought was going to happen next, and what those hoping to be one step ahead of the herd should do about it. He wrote:

In his latest issue, Schultz summarizes:

“Widespread stagflation will probably now build more inflation than stagnation, then gradually morph into more stagnation than inflation. Then, deflation takes over, and ultimately, depression. All this over next 9 years.”

“For the moment, seal off major wipe-out risks. Exit all money funds and currency time deposits, step up gold & oil positions, move into 1-2 year government bonds (non-US $) in First World nations. Swiss first choice. Think not of yield; think of an ark’s life preserver around your neck.”

Schultz, notes Brimelow, is currently negative on the U.S. stock market. But, the Swiss-based investment adviser predicts an upside target of $1,600 an ounce for gold as he believes its recent plummet in price is merely a correction.

Source:

“Unraveling according to schedule”
Peter Brimelow
MarketWatch, September 8, 2008

It’s A Hedge Fund Hell

Seems like yesterday hedge funds were all the rage. Now, however, the industry is trying to deal with its worst returns since 1990. James Quinn of The Telegraph (UK) wrote yesterday:

The $2,000bn (£1,122bn) global hedge fund industry is experiencing its worst performance in 18 years as a result of the continued credit crisis and wider economic malaise.

The industry, which has until now prided itself on out-performing other money managers, has become one of the many victims of the general downturn affecting financial markets.

Hedge funds are experiencing the worst returns since 1990, the year that Hedge Fund Research began tracking performance, with the average fund down by 4.7pc on the year to August 28.

Well-known funds such as those managed by Atticus Capital, TPG-Axon, Citadel and Lone Pine Capital, are reported to be down between as much as 6pc and 25pc so far this year.

Yesterday, New York-based Ospraie Management LLC informed investors it will close its biggest hedge fund after losing 38.6 percent this year alone on bad commodity stock bets. The Ospraie Fund opened in 1999 and had $2.8 billion under management as of last month. After the blowup, Ospraie Management is left with three funds consisting of more than $4 billion of assets, which is down from $9 billion in March. Ospraie was once the largest commodity hedge fund firm.

Squirrel Nut Zippers, “Hell” (1996)
YouTube Video Link

Source:

“Hedge funds suffer worst returns for 18 years”
James Quinn
Telegraph (UK), September 9, 2008

Goldman Sachs, Once Again, Warns Crude Oil Will Reach $149 By End Of Year

Global investment bank and securities firm Goldman Sachs is once again predicting the price of crude oil will climb to $149 a barrel by the end of 2008. Back on August 19, Goldman Sachs analysts issued a year-end price forecast of $149 a barrel. U.S. crude oil prices hit an all-time high of $147.27 a barrel back on July 11.

According to the CNBC website today:

The price of oil will spike back to $149 a barrel by the end of the year, despite its current slump and negative sentiment regarding demand for oil, Goldman Sachs wrote in a market report on Wednesday.

Chinese oil import data for August are expected to be weak as the country relied on existing inventories during the Olympic Games, but this is likely to change, the analysts said.

“We continue to expect that strong Chinese buying will return to the market as China restocks after the Games,” Goldman Sachs wrote. “For oil we continue to believe this will require (West Texas intermediate) crude oil prices to move back to $149/barrel by year end.”

Why believe Goldman Sachs analysts, as opposed to the “experts” now appearing on financial news channels claiming that the oil “bubble” has popped? Back on December 12 of last year I wrote:

Nauman Barakat, senior vice president of global energy futures at Macquarie Futures USA Inc. in New York, told Bloomberg today that, “Goldman has credibility because they were the first to predict that crude would spike to $100. A sharp increase in their forecast catches everyone’s attention.” Arjun Murti, a New York-based Goldman Sachs analyst who covers oil producers and refiners, roiled markets in March 2005 when he reported that oil prices could touch $105 a barrel during a “super spike” because demand was stronger than anticipated.

Source:

“Goldman Sticks with $149 Oil Forecast”
CNBC, September 3, 2008

Tropical Storm Gustav: Anyone Worried?

4,000 active oil and gas platforms in northern Gulf of Mexico
Source: National Oceanic and Atmospheric Administration

Tropical Storm Gustav
5-Day Track Forecast Cone (as of Tuesday night)
Source: National Weather Service

Jitters, anyone?

Farmers’ Almanac Predicts Cold Winter

Worried about high heating bills this coming winter? Maybe you should be. From The New York Times this Sunday:

People worried about the high cost of keeping warm this winter will draw little comfort from the Farmers’ Almanac, which predicts below-average temperatures for most of the U.S.

“Numb’s the word,” says the 192-year-old publication, which claims an accuracy rate of 80 to 85 percent for its forecasts that are prepared two years in advance.

The almanac’s 2009 edition, which goes on sale Tuesday, says at least two-thirds of the country can expect colder-than-average temperatures this winter, with only the Far West and Southeast in line for near-normal readings.

“This is going to be catastrophic for millions of people,” said almanac editor Peter Geiger.

Carsicles

The Almanac broke their forecast down by region. From the article:

The almanac predicts above-normal snowfall for the Great Lakes and Midwest, especially during January and February, and above-normal precipitation for the Southwest in December and for the Southeast in January and February. The Northeast and Mid-Atlantic regions will likely have an unusually wet or snowy February, the almanac said.

In contrast, the usually wet Pacific Northwest could be a bit drier than normal in February.

Source:

“Winter weather? Almanac says ‘Numb’s the word!’”
Associated Press, August 24, 2008

Goldman Sachs: Half The World’s Economy Threatened By Recession

Talk about an attention-grabber. Yesterday, Bloomberg’s Simon Kennedy wrote:

Goldman Sachs Group Inc. said countries that account for half of the world’s economy face a recession a year after the credit crisis began.

The U.S., Japan, the 15-nation euro area and the U.K. are “either in recession or face significant recession risks in the months ahead,” Goldman’s London-based international economist Binit Patel said in a report to clients today…

“Continued robust, albeit slowing, growth in China and the rest of the emerging markets” will deliver world growth of 3.6 percent next year after 3.9 percent in 2008, said Patel, who estimates emerging markets account for the other 50 percent of the world economy.

Bloomberg’s Kennedy added:

A year since the U.S. housing slump sparked about $500 billion in credit market losses for banks globally, the world’s largest economies are all stumbling as rising borrowing costs combine with record commodity prices to sap growth. The U.S. is close to a recession and France, Germany and Japan all contracted in the second quarter.

“And The Winners Are…”

Source:

“Goldman Sachs Says Half of the World Economy Faces Recession”
Simon Kennedy
Bloomberg, August 21, 2008

Goldman Sachs Predicts Oil Will Reach $149 A Barrel By Year End

Just when almost everyone was proclaiming the energy “bubble” had popped, global investment bank and securities firm Goldman Sachs comes along and rains on the parade. According to a Reuters piece earlier today:

Goldman Sachs reiterated on Wednesday its year-end price forecast of $149 a barrel for U.S. crude oil, and said strong fundamentals were a more important factor than a strengthening dollar.

U.S. crude oil prices hit an all-time high of $147.27 a barrel back on July 11.

The price forecast came in a research note dated August 19. Reuters reported:

“Although the recent correlation in dollar and oil prices is clear, it is important to emphasize that each of these assets are driven by multiple, varying factors… Put differently, there is more to oil than the U.S. dollar and vice versa,” the Goldman Sachs energy team said in the note…

Goldman Sachs said that despite the recent negative correlation between the U.S. dollar and oil prices, there was “very little correlation between oil prices and the U.S. dollar over the longer term.”

The Manhattan-based financial services firm said that it sees the crude oil market supported in the short-term by limited OECD oil stocks, a possible recovery in U.S. oil demand, near 10% growth in Chinese oil demand year-on-year in July, and a drop in non-OPEC production.

Reuters also noted that:

Earlier this year, Goldman Sachs equity analyst Arjun Murti predicted oil prices would spike to between $150-$200 before the end of 2009 due to his view of rising global demand and faltering supply.

The forecast for $149 oil comes at the same time a Reuters/Zogby poll was released showing most Americans think the worst is over for prices at the pump. From a different Reuters piece today:

Most Americans think that the worst of the fuel price spike that pushed gasoline above $4 per gallon has passed… according to a Reuters/Zogby poll released Wednesday…

The poll of 1,089 likely voters found that just under 13 percent thought gasoline prices would rise a lot between now and the end of the year. About one quarter thought prices would rise a little, while 18 percent said they would stay about the same.

Sources:

“Goldman Stands By Forecast of $149 For Oil”
Reuters, August 20, 2008

“Optimism About Oil, But Not Housing in Poll”
Reuters, August 20, 2008

Why Ethanol Sucks

“So ethanol is bad for taxpayers, bad for consumers, bad for the environment, and bad for the world poor. Does anyone benefit from ethanol?”

Wall Street Journal Online Video Link

Source:

“Ethanol: Silly Senator, Corn Is for Food!”
reason.tv
Wall Street Journal Online, August 14, 2008

Hedge Funds: Flash In The Pan?

On Tuesday, Jay Miller from the Wall Street Journal’s MarketBeat Blog talked about recent hedge fund performance. Miller wrote:

Hedge funds had a rough July as bets on rising commodity prices and falling financial stocks failed to pan out, according to research firm Morningstar Inc.

The Morningstar 1000 Hedge Fund Index fell 3.07%, its worst monthly performance ever.

“In July, the bet on long commodities and short financials didn’t work as well for hedge funds,” said Daniel Farkas, hedge fund analyst for Morningstar…

“It’s unusual for hedge funds to underperform equities in down markets, but hedge funds haven’t been able to navigate the credit crunch that started last summer,” Farkas said.

Hedge funds have had a tough time as of late. Back on July 10, I noted in a post that hedge funds, which often promise to make money in all markets, were in the red during the first half of the year. Chicago-based Hedge Fund Research reported that the average hedge fund was off 0.75% since January after slipping 0.68% percent in June, and that more funds went out of business during the first 6 months of 2008 than in the same period a year ago. In addition, fewer new funds were started.

There’s no shortage of hedge fund critics either. Recently, I read a piece that was suggested to me entitled “4 Reasons Investors Should Avoid Hedge Funds At All Costs,” which appeared on the website Bankaholic.com back on May 22. The author, Johns Wu, wrote:

But be warned, hedge funds are not all that they are cracked up to be. In fact, for an educated and conscientious investor, hedge funds can be a nightmare.

You can read the rest of the insightful article here.

And what about their most famous critic, the “Oracle of Omaha” himself- Warren Buffett? Back on March 13 I wrote in a post:

Just last week, the “Oracle of Omaha,” Warren Buffett, appeared on CNBC and warned of the volatile nature and exaggerated glamour of hedge funds:

CNBC: How do we see the end of this–of this explosion in hedge fund mania?
BUFFETT: Over time there will be a disillusionment when the–and incidentally, it won’t be disastrous or anything of the sort. There’ll be—there’ll be the occasional blowups here and there. But over time, when people find out that it’s not the holy grail, you know, the money will flow elsewhere. You know, people will–people always go through the rearview mirror, what’s been popular and has worked recently, and this will be like all the rest.

To be fair, hedge funds have been beating equity indices on a year-to-date basis. From MarketWatch on August 8:

Hedge funds tracked by Greenwich Alternative Investments fell in July, but continue to perform favorably against equity indices on the year. The Greenwich Global Hedge Fund Index (“GGHFI”) and the Greenwich Composite Investable Index (“GI2”) posted losses of -2.31% and -1.72% on the month, respectively. This compares to returns in the S&P 500 Total Return (-0.84%), MSCI World Equity (-2.53%), and FTSE 100 (-3.80%) equity indices. Year-to-date, GGHFI and GI2 have shed -3.00% and -1.82%, respectively, while equity indices have produced double digit losses. 32% of constituent funds in the GGHFI ended the month with gains.

“July highlights several popular hedge fund trades unwinding in a short period of time. While hedge funds as a group clearly had a weak month, their year-to-date returns still greatly outpace traditional long-only investment vehicles,” notes Margaret Gilbert, Managing Director.

Sources:

“It’s Hard to Be a Hedge Fund”
Jay Miller
Wall Street Journal (MarketBeat Blog), August 12, 2008

“4 Reasons Why Investors Should Avoid Hedge Funds at All Costs”
Johns Wu
Bankaholic, July 22, 2008

“Hedge Funds Lose Ground in July”
MarketWatch, August 8, 2008