You can rest easy today… the financial crisis is over.

CIT Group, the new epicenter of systemic financial risk, got thrown a lifeline this week from its bondholders. As we reported Friday, the company needed $3 billion — fast — in order to stay afloat. It was rightfully denied a government bailout, but was able to strike a last-minute deal with holders of its debt. Of course, the market rejoiced… the S&P 500 rose 1.1% yesterday largely on the news.
But again, we’re calling the market’s bluff. Anybody read the fine print of this deal? The loan was secured by “substantially all unencumbered assets.” That lawyer talk means CIT will have no collateral left over for a similar deal in the future. What’s more, the company will have to pay 13% annually on the $3 billion loan… no small order.

But most importantly, the whole deal is an ugly microcosm of 2008-2009. No problem has actually been fixed at CIT. The business still finances loans to tens of thousands of small businesses by borrowing from the credit market. CIT’s business model is still broken. They are still massively in debt. All they’ve done is create another liability.

(Just as we were about to publish today, CIT filed a warning with the SEC, saying that their bondholder rescue might not keep them out of bankruptcy. Wouldn’t you know it – they’ve got more bills coming due! On August 17th they’ll have to cough up another $1 billion. And so the madness continues.…)
Nevertheless, coupled with the recent earnings surprises from JP Morgan, Goldman Sachs and Citi, “investors were encouraged to see that the financial sector can take care of itself, without government bailout funds,” as CNN put it. Heh… right.
“Anyone who takes this as evidence of a recovering economy should work for the government,” sneers Bill Bonner. “Only a government economist or a mental defective (excuse us for being redundant) could believe that genuine prosperity can be built on a foundation of speculating by large financial institutions. You can see why by asking a simple question: Whom were they trading against?

“The banks’ core business is actually getting worse! The core business of banking is lending to people who are capable of paying it back — out of earnings. If the borrower is counting on higher house prices… or higher stock prices… to allow him to refinance on better terms, the lender is asking for trouble. Prices may go up… or they may go down. And if they go down, down goes the lender’s collateral too… and his hope of getting repaid.

“The banks made big mistakes in the bubble years. And now they’re paying the price. But so far, they’ve only made the first installment payment. Subprime loans started going bad two years ago. Then, people began losing their jobs… and loans of all sorts were in trouble.

“There is no sign that this process is over. Instead, it is merely proceeding in good order… just as you’d expect.”
The stock market rally has been tempered today. Ben Bernanke is testifying on the Hill — as good a reason as any for traders to sell a few shares. As we write, the S&P 500 is down 0.5%.
“Here’s a way to take some risk out of biotech investing,” says our small-cap adviser Greg Geunthner. “Check out the clinical testing sector. Companies in this industry oversee and review tests performed by the big pharmaceutical corporations, as well as biotechs. Usually, these firms offer full regulatory compliance, as well as laboratory services for a variety of clinical tests.

“Thanks to a regulatory environment that’s becoming increasingly difficult to navigate, drug companies large and small are outsourcing research and development spending more often. In fact, R&D outsourcing is increasing 17% per year. This puts clinical testing firms in prime position for tremendous growth.

“That’s why we’re looking at a virtually unknown clinical testing industry leader right now. It’s been in business for two decades, and it’s about to kick its business into high gear. It’s taking its newfound cash flow and investing it back in its business. Management has also laid out an aggressive plan, which includes the company completely paying off its long- and short-term debt by the end of the fiscal year, as well as growing its biomarker services division to meet growing needs in the industry.”

Want the ticker? Check out Greg’s Penny Stock Fortunes.
The California budget crisis has come to and end, but it looks like the whole mess is really just beginning. State lawmakers closed their $26 billion budget gap last night in a manner that will likely irritate every single special interest group in California and send shivers down the spines of the other states still facing similar crises.

So how’d the Governator and his brood pull it off? $15 billion in budget cuts, including mob-inducing measures like cutting health care benefits for underprivileged kids and cuts for welfare, education and municipal governments. Almost $4 billion will come from “new revenues,” aka higher taxes. $2.1 billion will be borrowed and the remainder will be “fixed” with good old-fashioned accounting fraud… no kidding. For example, the government will shift the last state payday of the current fiscal year into the next. Save that little problem for 2011!
No surprise, California’s faux budget fix failed to inspire a dollar rally. The dollar index found a new six-week low early this morning at 78.6.
When it comes to the fate of the U.S. dollar, “Two tsunami waves are crashing in to one another,” Rob Parenteau told us last night, “debt deflation on one side, and policy inflation on the other.” Rob delivered quite a speech at our first ever meeting of the Richebacher Society, amid the spectacular views of the hotel’s rooftop lounge. Our highlight came during a period of open dialogue between Rob and Riche Society members when he was asked how will we know when deflationary period is over and inflation — or hyperinflation — begins?

The answer, said Mr. Parenteau, is found in credit and wages. No matter how inflationary the government may be, true hyperinflation can’t be had until the consumer has access to excessive credit and his wages rise as the value of money falls. In the current environment, where credit is tight and wages are falling, rapid inflation would only be possible if there were a true crisis of confidence in the dollar. If that were to happen, he assured us, it’d be pretty obvious.

(We apologize to Rob if we hacked up his much more eloquently phrased explanation. Regardless, the first meeting of the Richebacher Society was a notable success. If you’d like to be around for the second, look here.)
Gold is holding steady after yesterday’s rally. The spot price hit $950 yesterday and has stayed put since.
“Around the world, miners are finding out that a mine is only worth something if you can keep it,” warns Chris Mayer. “And mining companies are finding it tougher to keep them as governments seize them or rewrite deals.

“Rio Tinto, for example, was knee-deep in a $6 billion iron ore project in Guinea. The government just stripped it of 50% of the mine. Guinea said Rio Tinto was moving too slowly.

“The problem is that as commodity prices have crashed, companies have cut back and slowed down new projects. But governments in these developing countries, which granted the rights to mine in their countries, were banking on getting all kinds of royalties and taxes. Plus, governments don’t want to see job losses, which in a lot of these countries could be seeds for unrest.

“China, for instance, is threatening to revoke a coal license from ArcelorMittal after the company warned it would cut jobs. In South Africa, the largest trade union wants the government to nationalize all the mines. In Zimbabwe, in Zambia and other countries, miners face all kinds of political threats.

“In short, political risks are on the rise. It’s fallout from the economic bust. Times are tight everywhere, but only governments don’t cut back. They just figure out new ways to grab money. So for now, focus on valuable resource companies in safer jurisdictions.”
Last today, a (little bit creepy) sign of the times: The depression has caused a revival of the DIY home burial.According to The New York Times, there are now at least 45 organizations around the country that help families bury their loved ones in their backyards, compared to just two in 2002. The rag says the average American traditional funeral costs about $6,000 and, naturally, families and the soon-to-be departed are looking for ways to save. The family the paper interviewed spent just $250 on their father’s burial.

Our favorite bit from the story was a fellow named Chuck Lakin. The humble old carpenter specializes in multipurpose coffins for home burial. After all, if you’re going to shell out a couple hundred bucks for a pine box to rot in, might as well have a place to store some of your favorite books while you wait for the hereafter.

How morbidly convenient!

“We’ve been looking around in Florida at foreclosures/short sales,” writes a reader, “and talking to people and have come to realize that the housing stats y’all get grossly underestimate the direness of the situation. We came across an approximately 300-unit condo project in Panama City Beach that purportedly cost the builder (bank) $66,000,000. These units were being pushed by a realtor for less than $200K each (159-199K). This realtor led me to believe that there are very few of these available (as in these are being ‘released by the developer’). Another realtor told me they are a bunch of short sales. I later learned that 15 are owned by individuals (sold in the past year), 20 are owned by some company in New York and the rest are owned by the apparent developer in Texas. It was like a beautiful ghost town. These condos do not show up as foreclosures or anything close.

“Talking to another realtor in Orlando, he had stories of people living in their homes for at least 18 months without making a payment and not receiving foreclosure notices. These also do not show up in the distressed numbers. The banks are using very creative ways of keeping from flooding the market and propping up prices as much as they can just to get whatever they can. We’re going to rent and figure the whole nasty thing out. Buyer beware.”

The 5: Thanks for your note. You are likely the first person to ever accuse us of grossly underestimating the housing bust. Considering vintage promotions like this, we don’t know how we could have rang the bell much louder.

Source: Banks on the Mend? Biotech Safe Haven, CA’s Budget Crisis, DIY Funerals and More!

• British GDP shrank 2.4% in the 1Q (more than the 1.9% shrinkage expected)
• The VIX – a widely used measure of market volatility is – fell 25 points. But it’s still 25% higher than average.
• US equity trading volume is also down – signaling a lack of demand… and a possible sagging in the recent bear market rally
• US Treasury yields have remained more or less unchanged over the month of June despite the boys at the Department of the Treasury flooding the market with an impressive $176 billion in new issuance
• Crude oil prices are up over $71 a barrel. Meanwhile, the IEA has lowered its forecast for oil consumption. (There is enough storage for 62 days of global consumption – 10 days above Opec’s stated goal.)
• June auto sales are will come in at about 10 million units annualized. This is less than 50% their peak and roughly back at levels last seen in the 1960s.

Rosenberg writes that “the crisis at the lower levels of government in the US is now so intense that as many as TEN states may not have a budget prepared for the fiscal year that is about to commence next month!”

Wow!

Notes faithful will be aware that we view the fiscal crisis in California as a precursor of what’s to come in America. The mechanics of this are very simple. The government spends too much money out of an empty pocket to appease and please. It relies on a just about half of the population (according to the IRS the top 50% of earners pay 97% of income taxes) to contribute the majority of the tax revenues. This upside down pyramid eventually topples (revenues shrink while spending increases), and the government is thrown into a “budget crisis” (which is really a spending crisis by a different name).

The US federal government isn’t far behind state governments (a) because it has a larger tax base to rely on and (b) because it can borrow seemingly infinite amounts of money on the international debt markets thanks to the dollar’s status as world’s reserve currency (foreign governments and banks need dollars to buy a wide range of commodities, which are priced in the US currency).

But one day (sooner rather than later in our humble opinion) foreign buyers of US debt wake up and realize that huge increase of dollar-denominated debt on the market is causing the value of the buck to decline… and they look for alternatives.

This is happening already. China and its fellow “Bric” nations, Brazil, Russia and India are already vocalizing their discontent with the dollar-pegged system. The problem is they don’t yet have an alternative mechanism to the dollar. But they’re working on it. And when they come up with an answer to their dilemma, $174 billion in Treasury bonds a month will no longer find a happy home. The feds will have no alternative but to raise yields to attract investors. Higher yields mean higher borrowing rates overall, which mean you can forget about a sustained recovery or a return to the golden years of US economic dominance.

According to Rosie, the situation in the ten problem US states “is so acute that state governments are now threatening to go after unused gift cards for sales revenues — affecting $7 billion of income for the retailing sector.”

So how’s the financial world faring so far this week? One chart should set the scene:

A seven-month high for our favorite metal may be sign that investors are losing faith in…. umm… everything. In fact, gold is up 33% since October, making it one of the planet’s finest asset classes during this “credit crisis.” Who’d have thought?

“I’m still very bullish on precious metals like gold and silver,” notes Byron King. “In the medium-to-long run, the stimulus bill will not be good for the U.S. economy, and I think the dollar is going to get burnt into toast over the next few years.” (Toast wouldn’t be that bad, we think… at least you could eat it.)

“If you are looking for gold stocks, find companies with high-grade ore in the ground and enough money in the bank to fund the current operational plans. I’m also looking at metals companies that are attractive to potential suitors, like large miners that want to pick up some great reserves.

“The bottom line is you need to own precious metals. Own gold. How much? For now, the more, the better. Own coins, if you can get ’em. Own bullion, if you can get it. Own shares in good miners with reserves in the ground while you can buy ’em. Just get some gold.”

Byron’s got a handful of gold stocks just like he described above in his Energy & Scarcity portfolio. Get the tickers — and a whole lot more — by subscribing, here.

(And there’s a whole other way to profit from gold’s rise… check out the P.S. below.)

By the time you read this, Barack Obama will have likely signed the stimulus bill, bringing to law the most hyped piece of legislation of the last few decades. He chose a special location to sign the bill, one of great historic importance and apropos to the credit crunch — the Denver Museum of Nature and Science. Huh? Yeah, among the 50 states, Colorado is purportedly on the front lines of the “green” energy revolution. Barack wants to play the part of George Washington this time around.

Anyway, the final price tag on this bestial bill exceeds $787 billion. Reduced to its simplest form for convenient public consumption, the new law looks like this:

The pie chart helps lawmakers avoid coming up with their own excuses for not reading the 1,073 pages of drivel littering the House floor right now. If you don’t want to come up with your own excuse, you can read some of the details here.

The only reason to write something this long is to dissuade anyone from reading it. As flat tax champion and former Vancouver marquee speaker Steve Forbes once wrote, “Abraham Lincoln’s Gettysburg Address, which defined the character of the nation, is all of 268 words. The Declaration of Independence runs about 1,300 words. The Constitution, which has served us for more than 2 centuries, comes to some 5,000 words. The Holy Bible has 773,000 words. The federal income tax code and all of its attendant rules and regulations: 9 million words and rising.”

One thing Congress wants to make sure you do understand: The bill’s “buy American” clause is still intact. Despite widespread warnings of 1930s-style protectionist meltdown in global trade, Congress went ahead and passed the provision.

The final version requires building and public works projects funded by the package to use only U.S. goods, like steel, iron, copper, concrete or wood. The revisions in the bill say the clause can’t violate existing trade agreements — giving the chocolate-making countries in Europe some relief. But as Reuters pointed out today, “Countries such as China, India, Brazil and Russia, which are not members of an international government procurement agreement, would be shut out.”

Just what a country in debt should do… shut out its bankers and trade partners…good thinking.

California might be grabbing all the headlines, but there’s a long line of state governors with their hat in their hands waiting for federal bailout money from this bill .

Kansas announced over the weekend it is suspending income tax refunds and state employee paychecks. New York, facing a $15 billion budget gap, is implementing all sorts of odd new taxes, including a 4% smack for downloading music and videos over the Internet. John Corzine is cutting programs left and right to fill the $2.1 billion gap in New Jersey.

In the Trendsetter State, Gov. Schwarzenegger is still flexing his muscles in front of the State Senate. The state has already shut down $3 billion in projects, delayed $3 billion in tax refunds and welfare checks and forced government employees into shortened workweeks. They’ve got three weeks to close the $42 billion gap between tax receipts and spending… or the state will simply run out of cash.

The credit crisis might lead to another improvement Californians would be happy with too: the legalization of marijuana.

Illegal weed sales exceed $14 billion in California each year — ironically just a billion short of California’s budget deficit last year. Considering the potential tax revenues at stake, it might be too tempting for the Governator to say no. According to a recent Harvard study, a national legalization of marijuana would reap $7 billion in annual tax revenues and save over $13 billion in law enforcement costs. That’s not even taking into account the assured boom in junk food sales.

Four more banks failed over the weekend, brining the 2009 total to 13. Friday the 13th proved to be bad luck, indeed, as the FDIC shut the doors of banks in Florida, Nebraska, Illinois and Oregon. All told, they took a $341 million chunk out of the FDIC’s apparently limitless coffers.

Retailers are showing small blips on the life-support monitor this morning. Wal-Mart, for example, surprised slumbering stockbrokers yet again with better-than-expected fourth-quarter earnings.

Little surprise, there, though.

“The 20% annualized pace of contraction in retail over the past six months,” writes our Rob Parenteau, “could not be sustained without delivering the United States to a point of mass starvation.

“Still, the free fall phase may be over, but the contraction is certainly not.

“Retail sales have been dragged down in part by the plunge in unit auto sales. Total units sold have already plunged below a 10 million annualized run rate — a level last observed in the 1980-2 double-dip recession. Eventually, replacement demand will become a factor supporting a bottom, and we are within months of approaching the 1971 spike down below 8 million units, the low of the past four decades.

“The Fed’s intervention in the asset-backed market is aimed in part at thawing the deep freeze in auto sales, but we suspect households will remain focused on rebuilding their saving rate. Purchases of big-ticket consumer durable items will continue to be postponed as precautionary saving becomes imperative.”

If you’re interested in real leading indicators of the credit crisis, rather than the useless sound bites you get from the mainstream press, check out Rob’s edition of The Richebacher Letter, here.

The Big Three automakers are due to turn in restructuring plans to Congress this week … if they want to maintain government funding, that is. GM is rumored to be cutting its number of brands in half, firing thousands of employees and closing more factories. Chrysler and Ford will likely follow suit. Officials from the UAW will, no doubt, continue to deny their own planned obsolescence.

The Dow nearly fell 300 points in the first half hour of trading this morning. Now flirting with 7,500, the Dow is a breath away from testing its credit crisis lows. No amount of stimulus can help the Big Board now.

“Just remember this,” urges Chris Mayer, as stocks seem poised for another dive. “All it takes is a few really good ideas to make a bundle in the stock market. Some stocks you buy, make some money with and sell. Some you lose on. But the biggest dollars will come from a few stars you buy, hang onto and then watch go up something like fivefold in a few years.

“Just a few great stocks can make all the difference. The odds of finding one of those rare gems is a lot better in a market like this than in one that’s been steadily rising for years. So don’t give up the quest.”

What’s the world’s greatest investor doing these days? Buying up the debt of legendary American brands. Warren Buffett’s Berkshire Hathaway picked up $250 million worth of debt from Tiffany & Co,, the famous jeweler. Factor this in with recent purchases of Harley-Davidson, Swiss Re, Goldman Sachs and GE and the trend is clear… the Oracle’s on the hunt for world-famous businesses in desperate need of cash.

Remember this mantra too… it could be a whole lot worse: Japan announced today its economy shrank a stunning 12.7% in the fourth quarter of 2008. That’s four times worse than the reported American contraction in the fourth quarter and the worst three-month stint for Japan since 1974.

China could care less. As the whole world burns, the Shanghai Composite has quietly climbed to a nearly six-month high. The index is up 30% year to date.

Despite the fundamentals plaguing the dollar, today’s flight out of stocks has the dollar on the up and up. In fact, it’s soaring…the dollar index is up a point and a half from Friday, to over 87.5.

And dollar strength spells oil weakness today. Light sweet crude is down two bucks, to $35 a barrel.

“With all the hubbub,” writes a reader, “over executive pay and who should regulate it, doesn’t it seem strange that no one addresses the root cause: that shareholders are deprived of their rights to make appropriate management decisions because of arcane state laws (proxy and other) and indefensible SEC rules that allow management to ignore stockholders and control companies for their own benefit, instead of managing for the benefit of shareholders. Management is simply not accountable to shareholders!”

“Dwight D. Eisenhower,” starts another, “in his farewell address to the nation warned of the growing threat to the nation from the military-industrial complex. Subsequent administrations have ignored his warning, to the peril of the country and the economy. Military spending is the least productive in the long run, doing nothing to build up the country. Instead of tanks, missiles, aircraft, etc. that our fear has bought us, we could have a first-rate health care system; a great educational system; up-to-date, state-of-the-art infrastructure; and fully funded Social Security programs.

“We have, in our paranoid fear, squandered all of these for military prowess, which impoverishes the nation in the end. The GAO has reported the audit of military spending every year since 1989 has not passed muster because the military has not been accountable. We, as Russia before us, are sinking under the inordinate weight of this monster.”

Cheers,

Ian Mathias

Source:Economy Down Gold Up, Stock Advice, Stimulus Bill to be Signed, Retail Forecast and More!