With the nation’s unemployment rate officially in double-digit territory and the under-employed rate ready to the 20% mark, the politicians that promised bliss in the days ahead are eating their words today.

And that means Wall Street is eating its recent gains.

For nearly a month, the Dow has hovered around the 10,000 mark. After hundreds of billions of dollars were withdrawn earlier this year, it was relatively easy to put that money back to work and send the equities market higher.

But now that the economic data is showing facts of slower-than-expected expansion rather than “ideas” of growth, investors are forced to explain their logic. The Dow doesn’t want to budge from 10k.

So far, I’ve heard very few reasons for prices to go any higher. Maybe in China or Australia, but certainly not here in the land where everything is changing.

Think about what has occurred over the past twelve months and tell me if you believe today’s companies are worth as much as they were two years ago or even five years ago.

We’ve had government takeovers of major banks, mortgage lenders, auto manufacturers and insurers. Washington has told people how much they can make in a year. Legislators even introduced retroactive taxes.

Then there is the threat of cap and trade blowing energy prices (an input to nearly every American business) sky high. Now it is mandatory healthcare and the risk to corporate payrolls, tax structures and discretionary spending.

After all that, I hate to think about what is next. An assault on allergens?

*** Maybe I’m just being too pessimistic. After all it has been a long week and I spent five hours at the airport in the middle of the night yesterday waiting to pick up my mother-in-law.

Don’t get me wrong. I think there are some fantastic buying opportunities out there. There are just not in the places most Americans are looking.

But since the mother-in-law brought me eighty pounds of fresh Alaskan salmon, halibut and moose meat (she’s as close to Sarah Palin as you can get without committing to Playgirl), I am starting to feel a bit generous today.

That means I’m going to share with you what I am certain will be the biggest gainers of the next twelve months.

First… healthcare. Think about it. Who is easier to rip off than the federal government?

Just ask Haliburton, Goldman Sachs and whoever sold those $750 toilet seats.

Within a year of signing some diluted version of Pelosi-care, the headlines are going to be filled with record-breaking profits out of the nation’s largest healthcare providers and drug companies.

If Wall Street has the nerve to toss out billions in bonuses while the ink on their bailout checks is still drying, imagine the kind of zeroes that will be added to the paychecks of healthcare executives.

I can hear the excuses now. “If we want to save lives, we have to retain the best workers.”

It is going to be a feeding frenzy when Uncle Sam is the third-party payer.

Next, forget about gold.

One reader wrote to me yesterday and said, “I think it will hit $2,000, but it will probably hit $600 first.”

Could not have said it better myself. Gold’s value is too tied up with political moves and currency fluctuations. With one well-timed press release, China can send the price wherever the heck it wants.

I don’t want my wealth facing that kind of risk, especially after we just rammed Beijing with the largest tariffs yet.

That’s why my money is on palladium. It’s much harder to find and has a huge industrial demand.

Palladium is at the heart of the world’s commodity carry trade. I told TFN Strategic Traders to play Stillwater Mining several months ago and the trade nearly doubled in a week. It is still a good buy, especially as China’s auto industry takes shape.

Finally, go short on natural gas. Get as much leverage as you can because prices are about to plummet fast.

On Wednesday, the International Energy Agency was one of the first major groups to back my opinion. In a draft of a report due out next week, the influential group warned of a massive glut of natural gas as global demand begins to top off and turn around just as we are pulling more of the stuff out of the ground than ever.

But don’t wait until Tuesday to read the report. You can read my version right now. In it, I recommend three ways to play the situation.

So far, two of the plays would have already doubled your money. All three are well into positive territory. Prices are almost out of my buying range, so do not hesitate to take action.

*** Before I go for the week, I need to make a correction. Yesterday, I inadvertently said the Senate extended unemployment benefits for 14 months. The actual extension is 14 weeks.

I apologize for accidentally releasing my psychic secrets. The 14-month extension won’t come until next spring, when Congress finally makes it illegal to layoff any employee.

Enjoy a great autumn weekend,
Andrew Snyder

Freddie and Fannie are huge government-chartered mortgage lenders. In 18th century France, speculators bet on the riches of Louisiana, through the government-chartered Louisiana Company. In the 19th century, they wagered their money on the riches of India, through the government-chartered Eastn India Company. And in the 20th century, they gambled on rising housing prices through Fannie and Freddie.

The immediate problem is that the mortgage lenders are running out of money. They need to raise $75 billion. A few years ago, that would have been no problem.

Everybody was ready to put money into America’s go-go, securitized housing market. But then, housing went.

Yesterday’s news tells us that housing prices are falling in 23 out of 25 U.S. metropolitan areas. That, according to Case/Shiller. Foreclosures are still rising at a faster and faster pace. Etc. Etc.

(We’re sparing you the details…we don’t want to upset you too much, dear investor.)

So now, Freddie and Fannie have a problem. They need to raise money – a lot of it. And now it has become “very difficult,” say the experts, to raise that kind of dough. Investors are slowly putting two and three together. The pair of mortgage lenders needs more cash. Their industry is in full flight. Their capital is disappearing.

Their collateral gets marked down every month: “Hey, maybe we should sell the stock!” The result of these deliberations was a bad day on Wall Street for the twins, bringing total losses into the billions for remaining stockholders, who were too slow or too dull to sell their shares.

And for the faithful and/or delirious masses who continue to cling to their Fannie and Freddie shares, the bad news has not yet abated. The giant mortgage lenders must still raise even more capital to cover their mounting piles of defaulting mortgage debts. Freddie and Fannie still need to raise money…lots more money. And if a report leaked from Bridgewater Associates turns out to be correct, so will a lot of other businesses…and governments. Bridgewater’s confidential memo – which got out to the Swiss press and then made its way to Ambrose Evans-Pritchard at The Telegraph in London – says that losses from the credit crunch could go as high as $1.6 trillion…four times as high as official estimates from the IMF.

And it only gets worse…

One trillion, six hundred billion dollars is a lot of money. If Bridgewater is right, the whole financial sector will be gutted. You’ll remember, dear investor, after manufacturing pulled out of America, the financial industry was left. And retail. Housing. Services. And not much else. The center of economic power shifted from Detroit and Trenton – where they made things – to Manhattan, where they financed them. Mothers ceased wanting their babies to grow up to be CEO of General Motors; they wanted them to go to Wall Street. That’s where the real money was. Finance was the key not only to huge profits itself, but also to the growth of the retail and housing sectors. People bought durable goods and consumer goods on credit. No credit; no purchases. No purchases; no consumer economy.

Well, now GM has lost 75% of its value…and the financial industry is not far behind.

Well, Bridgewater goes on to say that a $1.6 trillion loss in the financial industry will mean a loss of $12 trillion in credit to the economy as a whole. When the lenders don’t have capital, they can’t lend it out. Typically, they lend $10 for every dollar of capital. So if a dollar of capital is wiped off their balance sheets, as much as $10 of credit is erased from the economy.

Here in Europe, we’re used to high prices. One billion? Heck, we spend that much on lunch. But $12 trillion begins to sound like real money. And $12 trillion taken out of the U.S. consumer economy begins to sound like the Great Depression. Like Japan, 1990-2006…only worse. Collapsing asset prices. Rising unemployment. Bankruptcies. Defaults.

Of course, no central bank or government will go into that good night without a fight. The Fed will cut rates…and lower reserve requirements…and probably intervene directly in markets. Banks will be effectively nationalized…The federal government will increase borrowing and spending to try to offset the money disappearing from the markets and the economy.

What about the foreigners? What about Sovereign Wealth Funds? They’ve got a lot of money. Couldn’t they help recapitalize the credit system? Alas, the SWFs have only $3 trillion currently. And the foreigners? Our guess is that when they realize what is happening they will be desperate to get rid of dollars and U.S. paper of all sorts.

Instead, they’ll want real resources, factories, brands, concrete and land. And they will have a great opportunity. As asset prices fall, they will be able to buy more valuable properties in America at bargain prices. Already, Abu Dhabi bought the Empire State Building. A Belgian brewery, run by Brazilians, is buying Budweiser.
More to come…

How’s our “Trade of the Decade” doing? Eight years ago we suggested you sell stocks and buy gold. The bull market on Wall Street was over, we thought. A bull market in gold was just beginning.

As far as we can tell, we were right.

The S&P is down about 20% from its high…which puts U.S. stocks barely lower than they were in 2000. But adjusted for inflation, the loss has been spectacular. Remember, oil has gone from around $10 a barrel to around $140 a barrel. Everything else has gone up too. Even by official CPI numbers, the year 2000 buck is worth only about 80 cents. And the dollar against the euro is down about 40%.

Real bear markets typically last 10-15 years. This one has another few years to go. These should be the most interesting ones. Commentators are already looking for a bottom in the stock market. They may have to wait a long time.

An ounce of gold would buy the whole Dow in 1926…again in the 1930s…and once again in 1980. If gold stays where it is, the Dow would have to drop below 1,000 for the gold/Dow ratio to return to one. More likely, the Dow will drop and gold will rise to meet it. In 1999, gold bottomed out at around $260 an ounce. Since then it is up nearly 5 times. The U.S. money supply, however, has gone up 11 times. So, our guess is that there’s plenty of upside left for the stuff they make dental fillings out of. If it were to equal the increase in M3, its price could rise to $2,700 or so.

This is all guesswork, of course. But the Trade of the Decade still looks good to us. Gold and the Dow will probably come together somewhere north of 3,000….

Source: The Woes of Fannie and Freddie

What we do instead is determine what drove us into this crisis and monitor these drivers for any signs of a turnaround. We private investors are in no hurry and we are prepared to wait it out for as long as it takes.

As readers of the Fleet Street Daily and Fleet Street Research well know, I am bearish on banks. So why am I always talking about them? Because they are a leading indicator of the credit crunch. Banks led this crisis on the way down, and it is my belief that they will tell us when this thing is over. It is a sentiment that has been reinforced by many a market sage, including the legendary fund manager Bill Miller.

There’s a short and a long answer for why banks are so influential. The short answer: Banks represents around 15% of the total cap of the FTSE 350 making it near impossible to really take off when one sixth of the whole market is anchored by bad debt and ill will.

Over the past year, the FTSE 350 has fallen nearly 8%. Stripping out the banking sector — which has fallen 32% — that performance would be 6% higher and at all-time highs.

The long(ish) answer centres on contagion and securitisation. Still there? OK…

1. All things financial flow through banks.
2. As some of those things seize up — like borrowing rates and appetite for structured products — everything starts to fold.
3. When these things fold it starts to hurt businesses in the real world — like estate agents and mortgage lenders — which knocks sentiment and we end up in a vicious cycle.

When the blueprints and foundations are in doubt, people start jumping out of buildings and this creates a lot of casualties. That’s where we are up to now. But things are starting to change. Policy makers are making positive noises, mortgage banks are lending to borrowers and the stock market isn’t that far off its peak.

And now we have another reason to be cheerful. HBOS, one of the worst afflicted banks of the ‘crunch, surprised the market with a further signal that the end may-not-be-nigh.

HBOS goes back to ‘backed

The UK’s largest mortgage lender stunned the market by announcing that it successfully sold off £500m of mortgage-backed bonds, the first deal of its kind for any major European bank since the credit crunch struck last summer.

The mortgage-backed market has been all-but-dead recently. The method that sets prices for the complex securitised products has been called into question by academics, regulators and market traders alike. A lack of trust, transparency and appetite are part of the reason banks have been writing-down pools of mortgage-backed assets that they’ve been unable to shift.

That any bank successfully managed to create and actually sell a new product shows there is life in the old dog yet.

This is the bank’s first deal since July 2007 and may spur belief among peers that mortgage securitisation markets are somewhere to put your money once again after months of inactivity.

It’s not the first time products have been securitised — the banks have been recycling their own mortgages for a long time — but these were retained either on the bank’s balance sheet or swapped for gilts with central banks rather than offered up for public consumption.

This is the latest in a series of upbeat indications. Last month, the Bank of England launched a series of schemes to encourage trading in the market and it seems to have paid off. Spreads on top mortgage bonds fell more than 50% against government debt, which is a good thing.

The bonds are backed by a bundle of mortgages with an average Loan-To-Value (LTV) ratio of 61%. The LTV is the loan amount expressed as a percentage of the appraised value of a property… a 20% cash deposit on a property works out as an LTV of 80%, i.e. 61% is top stuff.

Seven firms bought the loans, made up of banks and insurers and the bond is set to have an average life of nearly four years. An HBOS spokesman commented that it launched the issue on the back of investor demand: “This is a welcome first step but does not mean the floodgates have opened.”

What does this all mean?

We all know that it’s premature to call the bottom. No one has the capacity to fathom the further twists and turns this tale could take. Everyone who pretended they could, and told investors to buy banks, has been dead wrong so far.

Nonetheless, if we are looking at what could be the resurgence of the structured investment market, this is a major milestone for banks:

Structured products have been dead in the water. Renewed appetite could kick-off a spate of big money deals and these divisions in the banks might start pulling their weight and start pulling in some revenue.

It also suggests that we will be seeing fewer write-downs. If there is a market to sell the assets then these losses will be wiped from the balance sheet. By extension, it could mean that bank shares could stage a comeback from their low levels as one of the drivers of the credit crunch appears to be subsiding.

It’s important to note that this is all best-case scenario speculation… that feint sound of a bell ringing in your ears could get you in trouble. It is still not time to pile into banks. When you invest in things you don’t fully understand, you and your money can easily be parted. There may be further twists and turns in the banking saga, and given the amount of opportunities in the UK market that have nothing to do with banking, I don’t know why you’d put your money there.

For a free pack on the kind of opportunities you should be looking at, sign-up to
The Fleet Street Letter. We warned our readers of the credit crunch before it struck and our tips have helped readers to navigate these dangerous times.

Theo Casey

Source: Banks Under The Microscope

The Jobs Jamboree… Can you believe that so much attention and drive to the markets is tied to this?

The dollar is a bit softer this morning going into the Jobs Jamboree, and rightly so, given the forecast. However, the dollar is still swinging a mighty hammer and I’m a bit perplexed by this. Last night I was up late (for me) and decided to put down some thoughts that were bouncing around in my head.

Well… How about that U.S. dollar? That’s some currency, Rudy! Why, look at it rallying against the euro (EUR) and other currencies as if it’s on a mission from God! It looks as if the United States has turned things around. The deficit no longer needs to be financed with over $2 billion a day in foreign investment… Interest rates are where they need to be to fight this soaring inflation… The government has stopped spending wildly, and the budget is balanced… The mortgage lenders have recovered all of their losses… There is no longer a credit crunch… And finally, the war is the Middle East is over.

But Wait! Unless I pulled a Rip Van Winkle and slept through all of that… These things haven’t happened, nor do they look as though they might begin to happen any time soon! So, what the heck has the dollar bulls dancing in the streets swinging a mighty hammer?

You’ve got me on this one. Folks, for once, I’ll admit that I have no idea what the heck is going on here… Serenity Now! Is this the pullback in the euro that I said we should look for in January, but never saw? If so… When will the tourniquet be applied to this gushing wound? Hmmmm… Good question! And I don’t have an answer to that either! I thought back in January when the euro was around 1.45, that we could see it fall back to 1.40, before moving ahead again… But that never happened. Instead we saw the euro climb to 1.50, then 1.55, then 1.60 in a little over three months time. Was it too quick? Is that what we’re seeing, merely a technical correction? Or is there something else in the works here?

Again… I don’t know the answer… But I’m hoping that in the days to come, it becomes apparent, and when it does, I’ll be Johnny on the Spot in reporting it to you! (Notice I said, “I’ll be Johnny on the Spot”, and not I’ll be “A” Johnny on the Spot! HAAHAHAHAHA)

This dollar rally has got the “naysayers” coming out of the woodwork too. Oh, the whole lot of them are pointing fingers and claiming they knew the dollar was undervalued, and blah, blah, blah… Where were these guys when the euro hit 1.60 about 10 days ago? They were hiding under the sheets!

Forgive me for this but this reminds me of when I coached my darling daughter Dawn’s girls softball team. The girls would do these chants on the bench that drove me nuts! But there was one that would just make me want to scream! We would be getting beat unmercifully, and the girls would be chanting something that ended with, “We can beat your team any old time.” UGH! But that’s what the naysayers are reminding me of right now. They are chanting about the dollar, when it has gotten beaten unmercifully for six years.

OK… Onto other things… The U.S. ISM Manufacturing Index remained well below the 50 level for the third consecutive month. I saw a news story yesterday where the writer was seriously talking about how Manufacturing will pick up due to the stimulus checks, as the receivers of those checks go out and spend them. Folks… The writer was serious…

I’ve told you over and over again that these stimulus checks might get spent by some… But I don’t see the checks getting spent by most. Instead, I see them using the money to pay down a credit card, or some form of debt, as the past couple of months has been quite sobering to the U.S. consumer.

Hey! You’ve got to feel good this Fantastico Friday, as U.S. Treasury Secretary Paulson is telling anyone that will listen, that we are “closer to the end” of the credit crisis. Oh, now that gives me a warm and fuzzy, given his track record of spouting off stuff like that in the last year!

I’ll bet him a shiny quarter that we’re only halfway through the credit crisis! The Bank of England (BOE) said yesterday that they feel as though the “worst is over” . Hmmm… Maybe these guys know something I don’t!

Down Under in Australia, retail sales surprised on the upside, printing at +0.5% versus the +0.3% that was forecast. Retail sales account for 40% of private consumption, which in turn accounts for around 60% of GDP… So this is important data for the Reserve Bank of Australia (RBA). The RBA will not need any excuses to keep rates at current levels given the strength of this data… And that thought should be a good underpinning for the Aussie dollar (AUD).

The U.S. stock market has been on a feeding frenzy since the rate cut on Wednesday. All this euphoria in stocks has the carry trade going great guns once again… This is being reflected in the price of yen (JPY) and Swiss francs (CHF)… I just don’t see how this can continue to go on and on and on. The carry trade has longer lasting power than the Energizer Bunny! But one day, it will all come crashing down like a house of cards… At least that’s my opinion.

There was another story yesterday about the Gulf States ending their dollar peg. This is getting out of control! About every three months these guys get together and make big plans to drop their dollar peg, and the media goes hog wild over the story. Shoot Rudy, I used to get all caught up in it too until I realized they were just being the boy who cried wolf.

As The Times points out, if you want to get on the property ladder now, you’ll have to raise nearly £7,500 for the deposit on the average house price of £148,000. That’s not to mention the big arrangement fee for the mortgage, and the near-£1,500 in stamp duty.

Anyone who thinks this market is heading for a ‘soft’ landing is delusional…

An opportunity for banks

Banks have taken a serious dent to their confidence over the past nine months or so. However, they’re rapidly discovering the bright side to the credit crunch – it’s the perfect opportunity to rebuild their profit margins.

As James Ferguson recently pointed out in his investment newsletter, Model Investor, mortgage lenders have been surviving on absolutely tiny profit margins, as they competed to offer the cheapest deals to consumers. That need to compete has gone now – nobody wants anything but the safest business.

So that means they can feel free to jack up their profit margins. And that in turn means that the impact of the credit crunch is being magnified when it comes to consumers.

Here’s why. When money was free and easy, banks would borrow money at say 5.0%, then lend it out at little more than that – say 5.2%. They had to – with around 15,000 mortgage products on the market, buyers had plenty of other options open to them.

But now that mortgages are harder to come by, people can’t be fussy. They’re desperate to find one bank willing to lend to them, let alone a selection. So even though it’s costing banks more to borrow money, they’re able to widen their profit margins substantially – say to more like 1% or more.

That’s not to mention the rapid rise in arrangement fees. I read at the weekend that one lender is now charging arrangement fees to take out its standard variable rate mortgage, something that was unheard of up until now.

Some commentators have been talking of how this is a return to a more ‘normal’ mortgage market, and it is. The days of easy credit were abnormally slack, and caused abnormal house price growth, which in turn fed upon itself, encouraging more people to make bad investment decisions, and more builders to build inappropriate flats in city centres.

Credit will become ridiculously expensive

The housing market is now ‘reverting to the mean’ after a long period of defying gravity. The trouble is, when things fall after rising for so long, they don’t just stop when they return to the historical average. They overshoot on the way down.

So just as credit was ridiculously cheap for a while, so it will become ridiculously expensive. And just as house prices were ridiculously overvalued, so one day, they will become ridiculously undervalued.

It’s hard to say exactly how far that process will go. But you can be sure that the level of falls we see will be much more in line with the gloomier predictions, than those still hoping for 5%, or even 10%. Wildcards include the recent changes to capital gains tax, which could well see many buy-to-let investors piling in to sell now, to lock in gains at the lower rate of 18% while they still have them.

Some individuals will feel the pain of falling house prices even more keenly. Anthony Hilton had a very good piece in yesterday’s Evening Standard where he pointed out that it’s hard to understand just how brutal a house price crash can be if you haven’t lived through one. He cited the example of one £1.3m home in London which fell as far as £650,000 in value.

Most of those homeowners and buy-to-let investors who bought into the market in the past five years were probably living at home with their parents during the last crash in the early 1990s. Many of them will be among the 75,000 households or so which Experian reckons will end up in negative equity this year.

Why the government can’t save the housing market

Inevitably, the clamouring is starting for the government to ‘do something’. But what can – or should – the government do? All through the boom, the bulls were claiming that the super-sized house price growth was based on fundamentals, and had nothing to do with slack lending practices. If they’re right, then prices shouldn’t fall very far before the fundamentals pick them back up again.

If they were wrong, then house price gains were a bubble based on rampant speculation. Those bubbles need to be allowed to pop, so that people don’t keep throwing good money after bad.

Of course, the reality is that many of the bulls knew this was a bubble. They just thought it was too big to blow. More than a few people used to argue that “the government will never let the housing boom end. It’s too important to voters.”

They will soon be reminded that there are few things less worthy of your faith than governments. For all its efforts, the Federal Reserve still hasn’t prevented US house prices from diving by more than 10%. Our leaders can’t hope to do any better.

Source: http://www.moneyweek.com/file/44993/the-end-of-an-era—the-100-mortgage-is-no-more.html 

Lawyers have filed over 70 securities-fraud class actions in the first quarter, three times the amount filed in the first half of 2007.

According to the report: “The targets aren’t only obvious ones like mortgage lenders and credit-rating agencies, either. They now include securities underwriters and mutual funds.”

It’s little wonder Americans are suing Wall Street institutions over the subprime mess.

“The part of the economy in worst shape now is the consumer,” says Bill Bonner. “He’s the one whose salary has not gone up. He’s the one whose house is being foreclosed. And he’s the one who’s got to buy gas and food.

“Banks now have twice as many foreclosed houses as they did a year ago. People take bus tours of foreclosed properties – looking for bargains… and generally depressing prices all over town.

“People are buying fewer SUVs. Hummers are having trouble finding buyers… (We have a brother in Virginia with one; he says his daughter refuses to ride in it, citing environmental damage). Consumers are getting more careful when they go to the grocery store.

“And even in the Hamptons, apparently the housing market is in a slump.”