“[We] must control the risk of real estate loans,” said a mystery banker. “In the first half of the year, our country’s banking loans expanded rapidly… but the loans growth has led to accumulated risks also increasing.” Our man of the moment said his banking sector had become “not prudent and impulsive” in issuing loans for new housing projects, many of which have falsified their capital levels to meet current standards. He urged lenders to “strengthen risk management” right way, before they loan themselves into poor credit positions.

So who is he? Robert Shiller, who just recently suggested another housing bubble could be in the mix? Or maybe some vintage Ben Bernanke, circa 2007? Nope… Liu Mingkang, the head of China’s version of the FDIC, said the above over the weekend at a conference in Beijing. China bulls take heed.

And at the risk of belaboring the obvious — he’s Chinese. We know what kind of exigency would get an American regulator to speak out against a bubble in the making. We imagine it’s far more politically dangerous for a member of the Chinese government to publicly go against the grain.
Back in America, the housing market rejoices: Housing starts climbed an unexpected 3.6% in June. According to the latest from the Commerce Department, builders broke ground on new homes at an annual rate of 582,000 in June, well above the Street’s expectations and the “best” month for housing starts since November. Curiously, single-family homes led the way, with a 14% building boom from the month before. That’s the biggest one-month gain since 2004.

Of course, this is a “signal that the housing market was improving” in June, as The New York Times suggests. But we dug up a longer-term chart of housing starts this morning that didn’t inspire as much confidence. Starts may have come up from the deep blue abyss, but we’re yet to emerge from uncharted waters

And who says more housing starts are a good thing? We may be market simpletons, but we’re under the impression home prices are falling because demand is exceptionally weak and supply is exceptionally high. So explain to us again how adding more inventory to the 3.8 million existing homes on the market helps stop the bleeding.
Over 1.53 million homeowners were in the foreclosure process in the first half of 2009. That’s an all-time high, said RealtyTrac late last week — and up 9% from the last half of 2008 and up 15% from the same time last year.

Around 1.9 million individual properties are in some form of foreclosure, or one in every 84 U.S. properties. And we’re adding new homes at an annual rate of 582,000? Really, we must be missing something this morning.
The stock market is still giddy over recent earnings surprises. The S&P 500 finished last week up 7% after companies like Intel, Goldman Sachs, JP Morgan, IBM and Citigroup all beat earnings.

Today the market looks poised to finish in the black again. CIT, the commercial lender we discussed Friday looks like it might live to fight another day. The lender managed a last-minute debt-equity deal with bondholders that will give them another $3 billion to play with. (Look for this crisis to repeat in a couple weeks.) Still, the market has dodged a bullet, and is up about 0.5% as we write.
“In last week’s market, you could almost feel portfolio managers reacting to the prospect of missing a rally,”writes Dan Amoss, a former money manager himself. “Career risk drives many irrational investing decisions. And missing out on a rally is a cardinal sin for portfolio managers. This goes a long way toward explaining this week’s rally.

“The consensus seems to be looking for a return to something resembling the environment before the credit crisis. They’ll be waiting for a long time. Sure, there are still lots of wealthy people. But the essence of the financial crisis has to do with most consumers and businesses stretching their budgets and capital spending plans in unsustainable fashion. The next few years will reverse this trend, and we’ll continue to see economic development in emerging markets maintain pressure on commodity prices.

“Mr. Market is now testing the conviction of the bears. But through the rest of 2009, the momentum favors the bears. The stock market is far below its peak, but this is justified by long-term fundamentals. In fact, the recent rally has priced in very rosy earnings for many sectors and stocks, including our short ideas.

“Remain patient with your short positions. This rally will end soon enough, probably by the time the fourth branch of government — the mega banks — are done reporting their paper trading profits and we learn more about the bleak outlook for earnings in the real economy.”
Four more banks failed this weekend. Two in California, one in Georgia and another in South Dakota got the FDIC kibosh late Friday. That makes 57 failed financials for 2009, at an FDIC cost of over $13.4 billion.
After a long flight from Baltimore to Vancouver, we were able to move through Canadian immigration last night with relative ease, but many Czechs and Mexicans were suddenly not welcome. Just another sign of the times… the Canadian government recently legislated rules that prohibit any Mexican or Czechoslovakian from entering Canada without a visa.

Canadians say political and economic strife in both nations has caused a wave of immigrants seeking refugee status, many of which are bogus. So the Canadian government drafted the law last Monday and enacted it on Tuesday… Canadian diplomats in Mexico City have been ripping their hair out ever since:

The scrum for last-minute visas at the
Canadian embassy in Mexico City

Heh, nothing stokes a free market like sudden and severe travel restrictions.
We’re in Canada this week for our Investment Symposium (more below in the P.S.) and got a visceral reminder of the loonie’s recent strength. 98 cents to the U.S. dollar at the airport currency exchange! No thanks… we’ll wait till we stumble upon a bank.

The Canadian dollar is once again rapidly approaching parity. The ol’ loonie is officially at 90 cents today, up a full cent since Friday and about a nickel in July. Most of the loonie’s strength can be attributed to dollar weakness. Since breaking through that historic barrier at 80 last week, the dollar index has been in steady decline. It’s at 78.9 today, nearly a two-month low.
Oil’s recent stabilization has been helping out the Canadian dollar, too. Light sweet crude traded as high as $64 a barrel today, a $4 bump from last week’s low.
Gold is performing nicely as the U.S. dollar falls. The spot price is up $20 from Friday’s low, to $955 an ounce.
“The first thing to understand,” writes Mr. Byron King, “as an old geology professor at Harvard once told me, is that ‘gold is where you find it.’ And the second thing to understand is that no matter where you look, gold is hard to find — and getting harder.

“In the past decade, gold-related exploration efforts and expenditures have increased dramatically. I’ve seen numbers adding up to tens of billions of dollars poured by mining companies into gold exploration.

“But despite the best efforts of the global mining industry, world gold production has DECREASED since early in this decade. Take a look at the chart below, depicting world gold production 1850-2008.

“I love this chart. I could spend all day discussing it. For example, look at the very steep rise in gold output during the 1930s. That was during the depths of the worldwide Great Depression. In both the U.S./Canada (blue area), and the rest of the world (gray area), people were digging more and more gold. The Soviets (purple area) increased their gold output too, courtesy of Joseph Stalin and his Gulag. Desperate times call for desperate measures, I suppose. Will that sort of history repeat this time around?”

If it does, will you be ready? Check out Byron’s favorite gold plays here.
“To back up Mr. Shiller,” writes a reader in response toRobert Shiller’s call that the new wave of “cheap” homes might cause another housing bubble, “I was Skyping a friend in Phoenix last week, and they were all excited that they just bought a foreclosed home for a ‘steal,’ with an 80/20 FNMA-backed mortgage. Not five minutes later, I read the 5 article regarding that the Phoenix market is still dropping. I still don’t think that many people (my friend included) get it that prices can still drop, and that just a 10% drop wipes out almost all their equity, since they will have to pay some sort of 6% commission. I myself have seen a greater than 20% drop on my very expensive house in Atlanta, costing me hundreds of thousands of dollars.

”My wife is an agent, and she has counted three (yes, three) home sales in our area in six months. Two of them were foreclosures. The unsold homes continue to accumulate, and the market is moving toward ‘the only sale is a short sale.’ I live in Augusta, and my prayers go to my neighbor who was just transferred up to an area outside of Detroit. I can see the wealth destruction personally, and can only imagine the nationwide ramifications.”

Source:   China’s Bubble Warning, New Home Paradox, Gold Production Sea Change, Vancouver Updates and More!

Bond investors are no doubt breathing a sigh of relief. Now that investors are waking up to the fact that a recovery is not “around the corner” after all, the yield on 10-year T-Notes is dropping and bond prices are rising again.

As long as investors have an appetite for low-yielding Treasurys (10-year Notes were yielding 3.53% yesterday), the government will have a tough time pushing its “green shoots” fairytale.

We challenge even the best paid of President Obama’s economic spin doctors to find the silver lining in the following two recent data points. This from MoneyMorning.com:

1. Unemployment claims unexpectedly rose yesterday, as the number of US workers filing new claims jumped by 15,000 in the week ended June 20 to a seasonally adjusted 627,000, the Labor Department reported. The four-week moving average of initial claims, a less volatile measure, rose to 617,250 from 616,750, signaling the US job market is stagnant.
2. US gross domestic product (GDP) contracted at a 5.5% annual rate in the first quarter after plunging at a 6.3% pace in the fourth quarter of 2008, the Commerce Department said yesterday (Thursday). That means the US economy just went through its worst eight-month period in more than 60 years, according to MarketWatch. The government last month estimated GDP fell at a 5.7% pace in the quarter ended March 31.

If you in any doubt about the dangers of relying on the mainstream media for your economic and financial information, here’s how the BBC, Britain’s state-sponsored news agency, had this to say about the worst eight-month contraction of the US economy in more than 60 years.

US economy better than expected

The US economy shrank at an annualised rate of 5.5% in the first three months of 2009, better than previously thought, government figures show.

This is pitiful. And it’s clear evidence that governments and mainstream media outlets really do believe that people are too stupid to notice what’s going on in the economy. Don’t be suckered. This kind of nonsense is dangerous: listen to it and you could get wiped out as an investor.

If you want to know why the economy is in the ditch… and ain’t “bouncing back” anytime soon, look no further than this chart. It shows the total level of equity in household real estate from 1952 to 2009. (Hat tip, The Big Picture.)

Sales at U.S. retailers dropped 0.4%, the eighth monthly decline in the last 10 months, following a revised 1.3% drop in March that was larger than previously estimated.  Excluding auto dealers, sales fell 0.5%

Economists had expected an increase of 0.5% to 1.0%.  Since July, retail sales have shown increases only in January and February, and those were attributed to post-holiday sales.

The disappointing numbers indicate surging unemployment and the worst housing market in decades could temper consumers’ appetite for spending for years, analysts said. As long as consumer spending is muted, which accounts for about 70% of all economic activity, any recovery from the worst recession in over 50 years is likely to be slow and difficult.

“These numbers are certainly discouraging, a bit disheartening,” David Resler, chief economist at Nomura Securities (ADR NYSE: NMR) in New York, told Reuters.

The news sent U.S. stock index futures reeling to steep losses in New York trading, while government bond prices enjoyed their biggest gains in weeks.
There can be little doubt that soaring unemployment is curtailing consumer spending. Unemployed workers naturally cut back on purchases and recent statistics suggest those that are still working are increasing their savings rate.

Despite the fact that payrolls fell by only 539,000 workers in April, the smallest drop since October, the jobless rate climbed to 8.9%, the highest level since 1983. Economists surveyed this month by Bloomberg predicted the jobless rate would average 9.6% in 2010.

The same survey also showed consumer spending will be unchanged this quarter after rising 2.2% during the first three months of the year. Last month, economists had forecast spending would fall at a 0.5% annual pace in the second quarter.

“The second quarter is going to be tough,” Bill Cheney, chief economist at John Hancock Financial Services Inc. in Boston, said in a Bloomberg Television interview. “Consumers are losing their jobs, concerned about losing their jobs and losing wealth.”

Retail sales fell even as consumer confidence started to rebound. According to last month’s report by the Conference Board, a New York-based private research group, consumer sentiment jumped in April by the most since 2005.

Falling demand at electronics, furniture, clothing and grocery stores led the decline in sales.

Gas stations also reported falling receipts in April, even though fuel prices climbed, indicating Americans may be cutting back on driving just as the U.S. enters the usually busy summer months.

Imported petroleum prices were up 15.4% in April – the largest monthly rise since a 17% increase in March 2002 – after February and March figures were revised upwards to 5.3% and 7.9% respectively.

Sales at car dealers were among the few retailers to show an increase last month. Auto sales gained 0.2% after falling 2% in March.

Counter to an industry report last week, the government’s data said sales at clothing retailers decreased 0.5%.

According to last week’s report from the International Council of Shopping Centers, the New York-based trade group that measures sales at about 40 retail chains, April same-store sales rose 0.7%, the first gain since September.

Wal-Mart Stores Inc. (NYSE: WMT), the world’s largest retailer, said sales at U.S. stores open at least a year rose 5%. Other retailers that said first-quarter earnings exceeded their forecasts included Kohl’s Corp. (NYSE: KSS) and BJ’s Wholesale Club Inc. (NYSE: BJ).

Those reports had raised hopes that shoppers are returning to stores. But yesterday’s report had retailers preaching patience.

“We’re still working our way through the slowdown,” Mike Niemira, chief economist at the ICSC, told Bloomberg. “I think it will get better as the year progresses. The month of May will still be tough and I suspect by the summer that things will be a little broader in terms of the improvement.”

Source:  Plummeting Retail Sales in April Bury Economic “Green Shoots”

Also happening today: President Obama is set to speak on the economy this morning, and Helicopter Ben is delivering a speech on “Four Questions about the Financial Crisis” this afternoon.

Hmmm…he should have called our emergency hotline we have set up for Treasury Secretaries and Fedheads. We could have helped him out with some of the answers to those questions…

CNNMoney.com reports that in the prepared remarks for his speech, Bernanke said, “Recently we have seen tentative signs that the sharp decline in economic activity may be slowing.”

The ‘signs’ he is referring to include recent upticks in home sales and new home constructions, as well as improvements in consumer spending, especially new vehicles.

“A leveling out of economic activity is the first step toward recovery,” said Big Ben. “To be sure, we will not have a sustainable recovery without a stabilization of our financial system and credit markets.”

Bernanke may have wanted to wait until the retail numbers were released before preparing those remarks. Nearly every expert that has been surveyed on this topic believed that U.S. retail sales, which count for half of consumer spending, rose in March, mainly due to the auto industry incentives that began last month.

However, it turns out that retail numbers pulled a fast one – and showed a drop in sales for last month.

Two months of gains has boosted hopes that March’s numbers would follow suit, building a rebound in consumer spending.

But, not so much. The Commerce Department showed that March’s retail sales were down for almost every type of store except necessities, such as food and drugs.

MarketWatch reports: “Retail sales in the first quarter were down 1.2%, compared with the fourth quarter of last year, raising the possibility that real consumer spending may have fallen again for the first three months of 2009 after plunging at a 4% annual rate in the final six months of 2008.

“Economist David Rosenberg of (NYSE:BAC) Bank of America’s Merrill Lynch said he expected consumer spending to decline at a 3.7% annual pace in the April through June quarter.”

“The retail sales figures indicated incentives and promotions by car dealers and clothing stores such as Gap Inc. failed to draw customers hurt by a lack of credit and the highest jobless rate in 25 years.”

In other words…outlook not so good for the economy. Americans have clearly been spooked by the high jobless rate. It seems that everyone knows someone who has been laid off, or had hours cut back…and the possibility of it happening to you becomes very real. So you cut back. You make dinner instead of going out…make do with last year’s summer clothes instead of going on a shopping spree. You want to make sure you have cash in the coffer…just in case.

This behavior begins to add up, as these numbers show. It makes you wonder: is it possible we are witnessing the taming of the American consumer? We’ll have to wait and see.

Now, we turn to Addison, with a report on what news has investors in a tizzy:

“The U.S. stock market dodged another bullet yesterday,” writes Addison in today’s issue of The 5 Min. Forecast. “Goldman Sachs (NYSE:GS) announced late in the day that it had pulled off a $1.8 billion profit in the first quarter.

“That’s $3.39 a share, more than twice as much as the market had anticipated.

“Investors are now wildly confident that Goldman Sachs will be one of the best performing financials of 2009.

“The Dow managed to end the day with less than a percent loss. The S&P 500 and NASDAQ both pulled off small gains.

“Curious how the markets work, though, isn’t it?

“In reality, Goldman benefited from a quirk in its new reporting schedule. ‘Its fourth quarter ended in November 2008,’ reports the Financial Times, ‘but after converting to a bank holding company last year, Goldman adopted a calendar-year earnings period starting in 2009. As a result, the company did not have to include December in its first quarter earnings, a month in which it sustained $1.3bn in pre-tax losses.’

“So Goldman actually made $0.5 billion in the first quarter. But who really cares? The investment bank is up 54% year to date!

“And since their stock is so ‘strong,’ Goldman bigwigs confirmed that they would move forward with a $5 billion secondary stock offering… the proceeds of which will be used to pay back TARP loans. Work it.

“Oh boy, ‘buyer beware,’ warns our short side specialist Dan Amoss. ‘The most responsibly managed banks should survive this downturn because cash flow from good loans should roughly offset the losses from souring loans.’

“‘Regulators will probably grant forbearance, meaning that they’ll look the other way while they allow bank capital levels to get dangerously low in 2009 and 2010. But just because many banks will avoid FDIC receivership doesn’t mean the stocks will be good investments.’”

And back to Kate, reporting from a blustery Baltimore:

“I hear that the government’s turn around on tax returns are up this year, which gets money back in the hands of consumers at a faster pace than previous years,” writes our good buddy Chuck Butler in today’s issue of The Daily Pfennig. “And we all know what happens when consumers get money in their hands: they spend it!”

Very true…but will the American consumer have anywhere left to spend their tax return?

A new report shows that strip malls, neighborhood centers and regional malls are losing stores at the fastest clip in over ten years. In addition, consumers are keeping a tighter grip on their wallets, causing retailers to trim down on the amount of merchandise available in the store, in order to stay afloat.

The report, done by New York-based real estate research firm Reis, shows that “In just the first quarter of 2009, retail tenants at these neighborhood centers have vacated 8.7 million square feet of commercial space. This number exceeds the 8.6 million square feet of retail space that was vacated in all of 2008.”

The report goes on to show that “vacancy rates at malls rose 9.5% in the first quarter, outpacing the 8.9% vacancy rate registered in all of 2008, marking the largest single-quarter jump in vacancies since Reis began publishing quarterly figures in 1999.

Are we still surprised at the disappointing March retail figures?

Now back to Goldman Sachs, which managed a major bounce back from its worst quarter since it became a public company in 1999.

Reporting their results a day early, Goldman said yesterday that it earned $1.8 billion, or $3.39 a share, for the quarter ending March 31.

But as Addison pointed out, above, Goldman did benefit from a ‘quirk’ in their new reporting schedule.

“Leave it to the clever boys at Goldman Sachs to turn dross into gold,” says our friend Barry Ritholtz in a post on his blog, The Big Picture today.

“The bulk of their profits had come from AIG transfer payments – the AIG 100% payouts funded via bailout monies that saw Goldie as one of the largest recipients. Floyd Norris notes that most of the AIG effect was in December. ‘For the first quarter, the total A.I.G. effect on earnings was, in round numbers, zero.’”

Wondering how this is possible? Well…that’s where the beneficial ‘quirk’ comes into play…

From the NYT:

“Goldman’s 2008 fiscal year ended Nov. 30. This year the company is switching to a calendar year. The leaves December as an orphan month, one that will be largely ignored. In Goldman’s news release, and in most of the news reports, the quarter ended March 31 is compared to the quarter last year that ending in February.

“The orphan month featured – surprise – lots of write-offs. The pre-tax loss was $1.3 billion, and the after-tax loss was $780 million.

“Would the firm have had a profit if it stuck to its old calendar, and had to include December and exclude March?”

“Truly astounding,” writes Barry, “the word Chutzpah simply does not do it justice.”

Source: U.S. Retail Figures Pull a Fast One

Total retail sales for March clocked in at $344.4 billion, a decrease of 1.1% from February and a 9.4% dive from March 2008. Overall, first quarter retail sales sank 8.8% compared to the same period a year ago, the U.S. Commerce Department said in a report.

The stats reverse the back-to-back monthly gains that kicked off 2009. Those gains surprised the market not only because they followed dismal holiday shopping numbers in November and December, but also because unemployment continued to get worse.

“The surprisingly sharp drop in retail spending shows how uncertain consumers are about the recovery,” Joel Naroff, president of Naroff Economic Advisers, wrote in a note to clients. “Consumer spending had been growing much more strongly in the first quarter than any of us could have expected, so a one-month cutback should not have been a surprise.”

Among the hardest hit sectors, gasoline station sales were down 34.1% from March 2008, and motor vehicle and parts dealers’ sales were down 23.5% from last year. Food and beverage stores held strong with only a 0.1% decline. Healthcare spending posted the best figures with a 2.2% annual gain.

“This was not a pretty report as demand for just about everything fell,” Naroff said. “There were large reductions in demand for furniture, electronics and appliances, building materials, sporting goods and clothing.”

Sinking demand for energy products played a large hand in keeping producer prices in check. The U.S. Department of Labor said that the Producer Price Index (PPI) for finished goods, a measure of inflation, fell 1.2% in March after inching forward 0.1% in February.

Prices for energy products fell 5.5% after rising 1.3% in February. Food prices fell 0.7% after falling 1.6% the month prior. Excluding food and energy, the PPI was a flat for the month.

While not a positive, flat inflation isn’t much of a threat when compared to the host of other economic issues the Obama Administration is addressing. In fact, the U.S. Federal Reserve said it expected inflation to be “subdued” in a March 18 statement.

But inflationary concerns will be on the horizon, when government measures to reboot the economy kick in – flooding the market with liquidity that can’t be absorbed by record low interest rates.

Source: Retail Sales and Inflation Slip in March

Total retail sales for March clocked in at $344.4 billion, a decrease of 1.1% from February and a 9.4% dive from March 2008. Overall, first quarter retail sales sank 8.8% compared to the same period a year ago, the U.S. Commerce Department said in a report.

The stats reverse the back-to-back monthly gains that kicked off 2009. Those gains surprised the market not only because they followed dismal holiday shopping numbers in November and December, but also because unemployment continued to get worse.

“The surprisingly sharp drop in retail spending shows how uncertain consumers are about the recovery,” Joel Naroff, president of Naroff Economic Advisers, wrote in a note to clients. “Consumer spending had been growing much more strongly in the first quarter than any of us could have expected, so a one-month cutback should not have been a surprise.”

Among the hardest hit sectors, gasoline station sales were down 34.1% from March 2008, and motor vehicle and parts dealers’ sales were down 23.5% from last year. Food and beverage stores held strong with only a 0.1% decline. Healthcare spending posted the best figures with a 2.2% annual gain.

“This was not a pretty report as demand for just about everything fell,” Naroff said. “There were large reductions in demand for furniture, electronics and appliances, building materials, sporting goods and clothing.”

Sinking demand for energy products played a large hand in keeping producer prices in check. The U.S. Department of Labor said that the Producer Price Index (PPI) for finished goods, a measure of inflation, fell 1.2% in March after inching forward 0.1% in February.

Prices for energy products fell 5.5% after rising 1.3% in February. Food prices fell 0.7% after falling 1.6% the month prior. Excluding food and energy, the PPI was a flat for the month.

While not a positive, flat inflation isn’t much of a threat when compared to the host of other economic issues the Obama Administration is addressing. In fact, the U.S. Federal Reserve said it expected inflation to be “subdued” in a March 18 statement.

But inflationary concerns will be on the horizon, when government measures to reboot the economy kick in – flooding the market with liquidity that can’t be absorbed by record low interest rates.

Source: Retail Sales and Inflation Slip in March

The U.S. recession is now in its 15th month, and many economists now expect the downturn to last until 2010 – if not longer. In fact, some economists now say the U.S. malaise could easily evolve into the virulent “L-shaped” downturn that Hutchinson predicted – a development that would guarantee both the maximum pain and the slowest recovery, experts say.

“I said in December that the recession could be ‘bloody-L shaped.’ With the huge deficits, that now looks the most likely outcome – and believe me when I say that it will be very bloody,” Hutchinson said this week. “The economy will bottom quite soon, but every time it tries to emerge the drags of the federal deficit, the huge bank bailouts and the huge money creation will drag it back.”

Noted Hutchinson: “It won’t get all that much deeper – it’s not 1929-33 – but my estimated emergence date is about 2013. The economy will remain essentially flat till then, although wobbles may make [it look like a “W-shaped” recovery] –until you realize there are more than two bends in the ‘W’.”

Nouriel Roubini, the professor with York University’s Stern School of Business who predicted the current financial and economic crises, wrote in the March 1 edition of The New York Times that the recession could last a total of 36 months. The U.S. slump – instead of following a typical “U” shaped rebound – “may turn into a more virulent L-shaped near depression,” he wrote.

Reports Keep Getting Worse

U.S. gross domestic product (GDP) contracted at a 6.2% annual pace in the fourth quarter of 2008, the U.S. Commerce Department reported Feb. 27. That’s the biggest drop since 1982, and was far more than analysts had anticipated, Money Morning reported.

The government had earlier estimated the drop in fourth-quarter GDP at 3.8%.  The subsequent revision of 2.4 percentage points was almost five times as large as the average adjustment. Global trade, which contributed a 0.1% gain in the advance report, actually subtracted half a percentage point from growth last quarter, indicative of the truly worldwide nature of the current financial crisis.

“Most of the major components contributed to the much larger decrease in real GDP in the fourth quarter than in the third,” the Commerce Department said. “The largest contributors were a downturn in exports and a much larger decrease in equipment and software.”

The U.S. economy lost 651,000 jobs in February, the fourth month in a row where job losses were right around the 600,000 mark. The unemployment rate rocketed to 8.1%, its highest level in more than 25 years. The U.S. economy has now shed 4.4 million jobs since the recession began in December 2007, with more than half coming in the last four months.

Thanks to a seemingly unending stream of bad news or disappointing economic reports, the Standard & Poor’s 500 Index has sold off sharply and trades at or near 12-year lows.

“This is what falling off a cliff looks like,” Lawrence Mishel, president of the Economic Policy Institute, told MarketWatch.com. [For a complete analysis of the February employment report, check out this story, which appears elsewhere in today’s issue of Money Morning].

Optimism in Short Supply

Because the U.S. economic landscape is so dour right now, economists say there could easily be another two to four years of malaise.

“I find it quite easy to imagine two consecutive years of contraction,” Harvard University financial historian Niall Ferguson, a financial historian at Harvard University, said in one of 11 assessments by economists that appeared in The Times. “I don’t rule out two more lean years after that,” he said. Bloomberg News summarized the assessments in an article last week.

Although the burst of the housing bubble, the U.S. financial system morass, global trade problems and soaring joblessness are all key contributors, the drop-off in consumer spending is the key culprit, since it accounts for 70% of the country’s economic activity.

Because U.S. consumers are in such bad shape financially – and are obviously both angry and scared – any “whiffs of growth [this year] are likely to herald a false dawn,” Morgan Stanley Asia (MS) Chairman Stephen Roach told The Times, noting that he doesn’t expect to see the economy begin to actually expand again until late 2010 or early 2011.

And when the recovery does begin, it will likely be weak – if not downright anemic.

For one thing, history shows that – after a severe banking crises – an economic system typically takes as long as four years to return to its prior personal income peak, says University of Maryland Economist Carmen Reinhart, an economist at the University of Maryland.

George Cooper, author of “The Origin of Financial Crises: Central Banks, Credit Bubbles and the Efficient Market Fallacy,” said that while the recession – as technically defined – could be over by the end of 2010, “the broader credit cycle will likely remain a significant drag on economic activity well into the next decade.”

Some Bright Spots?

There are some optimists – including former U.S. Federal Reserve insiders Alan Blinder and William Poole. Both Blinder, the former central bank vice chairman, and Poole, the former president of the St. Louis Fed, are both on record predicting an upturn in the economy late this year.

Blinder, a Princeton University economics professor, said that “housing must hit bottom at some point,” Bloomberg reported.
When that happens, house-hunters could come out in droves, said Eric E. Schmidt, the chairman and chief executive officer of search giant Google Inc. (GOOG).

“Americans love a bargain,” so the economy will get a boost from consumers jumping in to take advantage of once-in-a-lifetime buying opportunities, Schmidt said.

James Grant, editor of Grant’s Interest Rate Observer, agrees that falling housing prices will jump-start growth. But he’s just not willing to predict when that will happen.

“Today’s low prices, painful though they may be, are the market’s own shovel-ready stimulus,” Grant wrote in his Times Op-Ed piece. “Before you know it, the stock market, and the residential real-estate market, too, will be on their way back up again — just don’t ask when.”

Source: As Economic Reports Worsen, Experts Predict a Longer Downturn

And the bad economic data just keeps rolling in. U.S. foreclosure filings spiked by more than 81% in 2008, a record, according to a report released Thursday, and they’re up 225% compared with 2006. The total foreclosure filings in 2008 topped 3 million and showed no signs of slowing down in spite of the efforts of both the government and banking industry to slow them down. Foreclosure filings actually accelerated in the 2nd half of the year, increasing 17% in December over November of 2008.

The Fed gave us a glimpse of their view on the markets yesterday with the release of their Beige Book. Nothing in the report was a surprise, as respondents from the 12 Fed districts portrayed a gloomy economic scene. The report suggests the Fed may need to implement further measures to restore credit markets. The Fed districts reported more job losses, hiring freezes, and reduced hours. The New York district reported that ’substantial’ job reductions have yet to show up in payrolls data. Doesn’t sound good for the US economy in 2009.

Today we will continue to get negative news on the US economy with the release of Producer Prices and the weekly jobs numbers. Producer prices will bbe down and initial jobless claims will probably top 500k. We will also get the very volatile Empire Manufacturing and Philadelphia Fed numbers showing further rot on the manufacturing vine.

The dollar actually rallied with these numbers, as investors turned back to it as a ’safe haven’. This move is similar to the moves we saw in the latter half of 2008 as the dollar rallied in the face of poor US economic data. Chuck sent me his thoughts on this latest ’safe haven rally’ and wanted me to share them with you all:

“Reuters reported Wednesday night that the U.S. is close to extending Billions of more aid to Bank of America… Citigroup, as reported yesterday, is selling off units to raise capital… I wonder if Big Ben Bernanke and Hank Paulson drink more than 7 cups of coffee a day… Researchers show that drinking more than 7 cups of coffee a day may trigger delusions…

What does the rot on the vine at BOA and Citi have in common with delusions? Well… I think that Big Ben and King Henry are drinking more than 7 cups of coffee a day, if they believe their “stimulus” / TARP is going to get these two ginormous banks back on terra firma!

Remember the Lone Ranger? Remember a couple of years ago, when the dollar was propped up by Fed rate increases, and the tax amnesty for U.S. Corporations doing business overseas? Those props were pulled away one at a time, and for the next 2 1/2 years the green/peachback fell flat on its face… Well, it came up with another prop this summer… However, this time… There’s only one prop… The Lone Prop, I’m going to call it from here on out… It’s called the “Safe Haven” prop… And it has done the dollar well since July…

But just like in early December when I smelled a Santa rally to year end, and it happened… I’m seeing chinks in the dollar’s Lone Prop’s armor… The Fed has just about run the course of things it can do to get this economic engine revved up again, to no avail… And just like I said a couple of weeks ago, Paulson and Bernanke are like the King’s men, who tried to put Humpty Dumpty back together again! Their stimulus plans, their money supply injections, their guarantees on debt, their taking over the Commercial Paper biz, to their putting their hands in bank’s cookie jars… Nothing has worked… And why? Because, it’s not nature’s way to interfere! One of my all time fave songs, by Spirit (Randy California) called, “It’s Nature’s Way”… It’s nature’s way of telling, something’s wrong… It’s nature’s way of telling you in a song…. It’s nature’s way of receiving you… It’s nature’s way of retrieving you… It’s nature’s way of telling something’s wrong…

It’s obvious they were singing about something else… But I would say if sung today, it would be sung to the economy… One of these days, these mental giants will figure out to leave well enough alone, and let markets take their course… But that’s not happening now, and I’m sure it’s not going to happen any time soon, given the news that President-elect Obama wants control of the remaining $250 Billion in TARP money, and then wants to push through a stimulus package that will be anywhere between $800 Billion and $1 Trillion as soon as he takes office!”

Chuck is pretty amazing, he had another tough day at the doctor’s office yesterday, but still found the time to send me his thoughts on this recent move by the dollar.

The Euro sold off a bit yesterday as currency traders were waiting on the ECB which will likely cut 50 basis points this morning. Some actually began predicting a 75 basis point cut, but the noise on the street is confirming a 1/2% cut. But the markets will focus more closely on the press conference following the rate announcement. Many are expecting the ECB to signal more cuts are on the horizon, but I disagree. The leaders of the ECB have a hawkish tilt, and Trichet has continued to illustrate his desire to not follow the US Fed’s ZIRP (Zero Interest Rate Policy). A 50 basis point move would put interest rates at the lowest levels since 1999, and a further move would be unprecedented. Trichet said last month that there is a limit on how far the ECB can cut rates and will likely push for a pause after today’s cut.

But recent data out of Europe shows their economy continues to contract, and inflation is being held down so Trichet will face mounting pressure to drop rates further. If Trichet can hold the line, the euro will likely benefit vs. the US$. The euro rose 10 percent vs. the dollar in December, after Trichet said he wouldn’t be trapped with borrowing costs too low. The European economy is slowing, but will likely be able to weather the financial tsunami better than the US.

The emerging market currencies of Brazil and South Africa slid yesterday with ‘risk aversion’ back in vogue. The Brazilian real sold off to a two week low on concern over a further deterioration of the US economy. The South African rand sold off in concert with a drop in the price of gold and commodities. The higher yielding currencies of New Zealand and Australia also fell vs. the US$ as investors turned back toward the ’safe haven’ of the US$. But don’t expect this dollar strength to last, as this lone prop of ’safe haven’ will be kicked out from under the dollar.

On to the currency wrap up:

Currencies today 1/15/09: A$ .6632, kiwi .5379, C$ .8033, euro 1.3170, sterling 1.4602, Swiss .8928, rand 10.1408, krone 7.2099, SEK 8.3956, forint 212.64, zloty 3.2109, koruna 20.6965, yen 89.11, sing 1.4957, HKD 7.7598, INR 49.0175, China 6.8365, pesos 14.1862, BRL 2.3841, dollar index 84.253, Oil $37.80, Silver $10.50, and Gold… 812.35

That’s it for today… I see where the ECB did cut 50 basis points, which was widely expected. I can look forward to another full day of meetings on the new computer system we are looking to install later this year. I’ll be heading out to Colorado tomorrow for a ‘guy’s weekend’ of skiing. Hope everyone has a Terrific Thursday!!

Source: Retail Sales Disappoint

Non-farm payroll employment fell by 240,000 in October, and the unemployment rate jumped to 6.5%, up from 6.1% the month before, the Bureau of Labor Statistics reported in early November.

October’s drop in payroll employment followed declines of 127,000 in August and 284,000 in September, according to revised BLS reports. Employment has fallen by 1.2 million in the first 10 months of 2008, with more than half of that decrease occurring in August, September and October. In October, job losses continued in manufacturing, construction and several service-providing industries. Conversely, the healthcare and mining sectors saw their job ranks grow.

And it’s going to get much worse before it gets better, Goldman Sachs Group Inc. (GS) has predicted. Goldman Sachs says the U.S. unemployment rate will spike to 9.0% by the fourth quarter of 2009, as corporate profits plunge an estimated 25% – and that’s after an estimated decline in profits of about 10% this year, Goldman analysts say. The U.S. economy – as measured by gross domestic product (GDP) – will decline by 5.0% in the current quarter, followed by declines of 3.0% in the first quarter of 2009 and 1.0% in the second quarter, Goldman analysts predict.

Those numbers are worse than Goldman originally predicted, and create an outlook similar to Money Morning’sprojections, which called for a credit-crisis-nurtured economic downturn that could last as long as 12-18 months.

The NBER yesterday (Monday) formally announced that the U.S. economy peaked and entered into a recession in December 2007. The U.S. Commerce Department estimated that the U.S. economy, as measured by GDP, rose 0.9% in the first quarter. In the second quarter, GDP advanced an estimated 2.8%. For the third quarter, GDP declined an estimated 0.3%.

Also this week, the U.S. Federal Reserve’s “We have marked down our forecasts for US real GDP in response to continuing signs of falling domestic and foreign demand, labor market deterioration, renewed tightening in financial conditions, and an apparent impasse in fiscal policy pending the transfer of power to the Obama administration in late January. As a result, we expect the unemployment rate to reach 9% by the fourth quarter of 2009, profits to fall 25% for 2009 as a whole following an estimated 10% drop this year, and the Federal Open Market Committee (FOMC) to use nontraditional policy tools more aggressively, as detailed below – Beige Book – due out tomorrow (Wednesday) – offers a look into activity within the various regions of the country.

Weekly Economic Calendar

Source: November Unemployment Statistics to Highlight Economic Reports This Week

The people of the United States of America prayed for a political messiah. Now that he has stepped forth, we are left to wonder, what next?

Politics is not really our beat here at the Rude Awakening, so we won’t be offering up any four-legged sacrifices for the promise of financial salvation. In the harsh light of economic reality, miracles are hard to come by, even for those claiming to posses the kind of optimistic foresight that defies rational explanation.

A cursory glance toward the economic horizon reveals some perilous obstacles ahead. As we walk through the valley of 5-year market lows, the shadow of the death of consumer spending looms particularly large. American consumers, upon the backs of whom almost two-thirds of the world’s largest economy rests, cut spending by an annualized 3.1% for the third quarter. For perspective, that marks the first quarterly decline since 1991, as well as the largest quarterly decline in 28 years, according to the U.S. Commerce Department.

Meanwhile, prices of goods and services purchased by US residents jumped 4.8%. That’s on top of a 4.2% increase in the second quarter. Even excluding food and energy, prices were still up by 3.1% in Q3.

As the consumer-driven economy grips the emergency brake and higher prices put the squeeze on employers, jobless rates continue to skyrocket. The Department of Labor is expected to announce the loss of 200,000 jobs for the month of October when it meets on Friday. That would drive unemployment to 6.3%, up 0.2% from September.

Shrugging off all these annoying statistics, however, the market continue to mount a herculean rally. After posting its worst month since 1987, the Dow surged an impressive 300 points Tuesday in anticipation of Obama’s victory, topping off double-digit gains for indexes across the board last week.

Could we be witnessing a miracle in the making here? Is it possible that a new tablet of financial commandments might render the age-old saws of saving and producing nothing more than outdated or even, dare we say, profane?

We wouldn’t dare offend any divine and future superintendent of the financial universe by asserting otherwise…but we reserve the right to remain unconvinced.

In the absence of proof that what goes up need not come down, we will continue to seek our financial guidance from within the “boring” confines of reality. And so, we turn to the inimitable Rude Readership for the results of our latest Group Research Project.

A couple of weeks ago, we asked readers to submit their favorite “chicken longs.” Put simply, we wanted to know what stocks readers would like to have in their portfolio should the heavens open up and curse the earth with a great financial flood. Such stocks might derive their buoyancy by paying a large dividend, enjoying a competitive position in a relatively “high ground” sector or through some other means of protection.

We have no clue as to whether the President Elect will perpetuate the current state of fiscal delusion or merely usher in a winter of slightly milder discontent…but it is probably best to be prepared for either scenario.

Reader “Bradbarb69″ kicks off our newest Rude Awakening Group Research Project with the following cheerful suggestion:

“I like prison stocks. There will never be a shortage of lawbreakers at any level, and governments must maintain prisons for the public good. As crime rises (as it inevitably will) these stocks will be good holdings. I also like [the cemetery operator] Stonemore Partners L.P. (NASDAQ:STON) for its high dividend and for the fact people will always die no matter what the economy does. Personal protection stocks are also on my list of “buy at the right price.” I’m thinking in particular of Smith & Wesson (NASDAQ:SWHC) and Taser International (NASDAQ:TASR).

[Editor's Note: Although Bradbarb69 did not provide any specific names in the prison sector, a couple that come to mind are Geo Group (NYSE:GEO) and Corrections Corp. of America (NYSE:CXW).]”

Reader Tom Winstanley recommends Weir Group, a Scottish company that trades in the U.S. over-the-counter market under the symbol, (PINK:WEIGF).

“This company makes boring old pumps,” Tom explains. “Energy and Water are two areas that simply will not wait upon the recovery of the world economy. Come hell or high water, governments know that if they cannot keep the lights on, provide as much fresh water as their people are used to having available and treat waste water to high standards, then they will be more trouble than they can handle. Pumps might be boring but try getting by without them – whatever the state of the economy!” [Editor's Note: Weir trades for less than eight times estimated earnings and yields 4%].

Reader Susan Vander Voet likes the Brazilian oil giant, Petroleo Brasileiro (NYSE:PBR), also known as Petrobras. The stock was trading around $21 when Susan submitted her email to us. Today, the stock is around $30.

“I’ve been watching this company for about a year,” Susan writes, “and the reasons for my recommendation are:

1. Active and with interests in several Latin American countries (Brazil, Ecuador, Chile, Peru) in exploration, production, distribution and retail;
2. Huge offshore resources discovered in Santos Basin;
3. Active in several African countries (Angola, Tanzania);
4. Stock is trading well below the moving average, which has trended upward for 5 years;
5. As oil prices are projected to recover (in 2009), I see this stock at least doubling its current value ($21).”

Reader David Myrhre identifies Harvest energy Trust (NYSE:HTE), a Canadian investment trust, as his “current fave.” The stock, which was trading below $8.00 when David submitted his email to us, is now north of $11. But even at the current quote, the stock is well below the $18 price tag it fetched in September. What’s more the indicated yield on the stocks is a whopping 27%.

“I’ve heard worries that the dividends will go down because oil prices have gone down,” David explains “But these oil producers sell on annual and multiyear contracts.  Dividends didn’t go up when spot oil prices spiked and they won’t go down just because spot prices did.”

Elsewhere in the Canadian investment trust sector, reader Greg McLean highlights Peyto Energy Trust (PINK:PEYUF), a stock that yields about 14%. Greg also likes Hanfeng Evergreen, “HF” on the Toronto Stock Exchange. “Hanfeng is a small Canadian company that makes slow release rice fertilizer in China,” explains Mr. McLean. “Hanfeng has decent earnings and cash, little debt and is trading close to book. I feel confident betting China will continue to grow rice.”

Another high-yield energy stock is Atlas Pipeline (NYSE:APL), which is a stock that reader Don Gish favors. “My favorite bear market stock is Atlas Pipeline (APL),” Gish writes. “The sudden drop of the energy market and other market sell-off factors have driven APL unrealistically down.  [At the current quote, the stock yields about 20%].  I believe APL’s focus on natural gas pipelines with no exploration/development costs and long term contracts has created an excellent long term dividend with significant potential for future stock price upside.  I love this position, so I have to resist my desire to buy more.”

Lastly, reader Scott Lovinghood writes: “I have a suggestion for a chicken long: Blackrock Municipal Income Closed End Fund (NYSE:BKF).  It is primarily invested in tax free municipal bonds.  At current prices the yield is just a hair under 8% TAX FREE!!  The fund covers many different states and markets.  California is the largest concentration at only 11% of the fund.  The majority are longer dated bonds, so unless municipals are totally wiped out, the monthly pay outs should continue.  The shares were hammered recently due to the credit freeze. The stock’s NAV is $10.15.  But the stock is only $9.20…Not a bad deal.”

And so concludes Part I of our newest Rude Awakening Group Research project.

Source: Chicken Longs