And with good reason. The United States has a bigger and more-troubled financial sector than most countries. It also has a bigger overhang from the housing bubble, has a bigger balance-of-payments deficit and has a budget deficit that’s fat enough to stall the recovery.

It would be nice to have an economic recovery to invest in that didn’t have all of these problems.

Truth be told, such an investment play does exist. What’s more, the market I have in mind is advanced enough for us to invest in it without having to go through all the rigmarole of American Depository Receipt (ADR) investing. Nor will you have to make a potentially risky foray out onto some foreign stock exchange to buy the shares, because they are almost all listed here.

The country I’m talking about is Canada. Think of it as being like home – but without the problems that our home market (the United States) currently suffers from.

Our Healthy Neighbor to the North

When the recession struck, Canada was hit by it quite badly, but for different reasons from its southern neighbor. The Canadian housing market was nowhere near as overheated as its U.S. counterpart. So Canada’s housing downturn wasn’t as deep.

And what about the banking systems? To be sure, Canadian banks received a bailout, but it was less than $20 billion in total. Compare that to the veritable alphabet soup of U.S. bailout programs ranging from “TARP” and “TALF” that have injected more than $2 trillion into the U.S. financial system.

On the other hand, natural resources prices crashed last autumn, which had a major effect on Canada’s resource-based economy. A number of large projects in the Athabasca Tar Sands region were cancelled, for example – since this region has oil reserves around the size of the entire Middle East, its development is crucial to Canada’s future.

The “loonie,” Canada’s currency, declined from around “parity” to the U.S. dollar to an exchange ratio of C$1.30=$1 U.S. In effect, this was a “flight to safety” into the dollar and U.S. Treasuries. And it affected Canada as it did other countries.

In 2009, however, Canada and the United States have traveled down totally different paths. Canada did very little “stimulus,” so its state budget is in much better shape. The deficit for the 2009-2010 fiscal year $53 billion (C$56 billion) is only about 4% of gross domestic product (GDP). For the 2010-2011 fiscal year, the deficit is expected to be about $42 billion (C$45 billion), or 3.2% of GDP.

Energy Powers the Rally

The bounce in natural resources prices has really helped power up the rebound of Canada’s market.

Investment in the tar-sands region has picked up again, with a big merger between the two largest tar-sands-extraction companies: Suncor Energy Inc. (NYSE: SU) and Petro-Canada. The rising gold price hasn’t hurt either – mines are appearing all over the place! All this new activity has made the loonie bounce, so it’s back to about C$1.07=$1. While interest rates are as low as the United States, the Bank of Canada hasn’t done much “quantitative easing,” meaning that inflation isn’t too much of a worry.

The strong loonie helps here, too.

Canada seems to be recovering nicely. Its index of leading indicators jumped 1.1% in August, while manufacturing sales grew 5.5% in July. The country presently runs a modest current account deficit, but it’s only 2% of GDP. That’s much lower than even the current U.S. deficit, let alone that of 2007. It had a little more public debt than the United States in 2008, but given current U.S. deficits, those two lines almost certainly have crossed by now.

There are two caveats. The first is an obvious one: If commodity prices crash to earth, Canada will have some difficulty because commodities are a large part of its economy. Personally, I don’t see that happening. It’s notable that PetroChina Co. Ltd. (NYSE ADR: PTR) has just invested $1.7 billion in a Canadian tar sands project, so China must not think so, either.

The other risk is political. The current minority Conservative government of Stephen Harper has done a good job, but the opposition Liberals have withdrawn their parliamentary support. That means there may be an election this autumn. A Liberal majority government would be no disaster. They might be a bit sticky about oil-drilling permits, but would not otherwise rock the boat.

However, a Liberal coalition with the leftist New Democrats could push public spending and the deficit up, and there’s no guarantee against that. (One of the problems with multi-party systems like Canada’s is there is an almost infinite variety of possible governments after each election, some of which can be fairly alarming from a business perspective.)

However, Canadian elections are a much smaller risk than you get in most countries, and the commodity/oil price crash, if it happened, would help the U.S. economy and, presumably, your U.S. portfolio. So it’s worth having some Canadian exposure, perhaps with the Canadian market exchange traded fund (ETF) iShare MSCI Canada Index (NYSE: EWC).

For years it was almost fashionable to dismiss Canada from an economic standpoint. Now, however, that may well be where the smart money would like to go. As an economy, Canada is competent and stable.

It’s the kind of country that looks to be a good place for some of our money.

After peaking north of the $1,000 per ounce price level last year, gold hit a stumbling block when deflationary fears in the world’s largest economy sucked the air out of commodities prices and sent hoards of investors stampeding into the safe-haven of U.S. Treasuries, and helped spawn a rebound in the U.S. dollar.

Since that time, the global economic outlook – especially beyond U.S. borders – has improved, and gold prices have stabilized.

The next step – many gold bulls say – is for the yellow metal to make a run for new highs.

Whipsaw Trading Patterns

Gold started 2009 at about $870 an ounce – down substantially from early 2008 when prices hit a record-high $1033.90, but significantly higher than the $712.30 an ounce it was trading at in mid-November.

Then, when talk of inflation resurfaced in February, and later in April, prices surged well over $900 an ounce, again testing the $1,000 level. Gold prices hit $983 in early June – a 38% jump from their November low.

Gold prices have since lost some of that momentum, dropping back down to $940 an ounce, but many analysts believe this is where gold will find support before eventually shooting back to $1,000 – and possibly even higher – by the end of the year.

There are many reasons to believe that gold is poised for such a strong showing: Supply of newly mined gold is dwindling, fresh discoveries of deposits are on the wane, and demand has remained strong.

But the biggest reason analysts believe gold will rebound to its 2008 apex is that the medium and long-term outlook for dollar is rapidly darkening.

Government Support for Gold

With the U.S. Federal Reserve pursuing a policy of quantitative easing and a federal budget deficit that’s spiraling out of control, the dollar is extremely vulnerable.

The Federal Reserve has lowered its benchmark Federal Funds rate to a range 0%-0.25% and has said it will remain there for “an extended period.”

The Fed has also injected more than $2 trillion into the financial system, expanding credit through increased loans to banks to provide liquidity. It’s also created the Commercial Paper Funding Facility – which holds $109.2 billion in short-term IOUs issued by corporations – and the Term Asset-Backed Securities Loan Facility (TALF) – which has lent $25 billion to investors to buy securities tied to auto and other consumer and business loans.

And the central bank itself has pledged to buy $1.75 trillion in mortgage-backed securities, Treasury notes, and federal housing agency bonds.

“In the last year alone, the U.S. Federal Reserve has actually doubled the U.S. monetary base,” said Money Morning Contributing Editor Peter Krauth. “That can only lead to serious inflation, perhapseven hyperinflation.  This will cause the value of the U.S. dollar – which has been eroding since 2001 – to decline at an even-more-frenetic pace.”

In addition to the Fed’s action, the United States’ spiraling debt poses a significant threat to the dollar’s value, as well.

Federal debt will reach $12 trillion by this fall and exceed $13 trillion by September 2010, according to theCongressional Budget Office (CBO).

The CBO projects the U.S. budget shortfall will reach at least $1.85 trillion – equivalent to 13% of the nation’s gross domestic product (GDP), a level not seen since World War II – in fiscal 2009. And if the economy doesn’t rebound soon, that number will very likely top $2 trillion by the end of September.

The CBO anticipates the deficit will shrink to about $1.4 trillion in fiscal 2010 and $1 trillion in fiscal 2011, if the economy continues to stagnate, there is a good chance that those budget shortfalls will be even greater than the fiscal 2009 deficit.

Some of U.S. President Barack Obama’s advisors have already acknowledged that the administration underestimated the rapid rise in unemployment and that a second stimulus may be in the cards.

Laura Tyson, former chair of the U.S. President’s Council of Economic Advisers during the Clinton administration and current advisor to President Obama, said July 6 that the $787 billion stimulus passed in February was “a bit too small,” and that more may be required.

But if another stimulus is needed, how exactly does Washington plan on financing it?

While the government has continued to find buyers for its Treasuries, the question being asked by analysts is at what point will investors start to balk at continuing to finance the American expenditures.

China – the largest holder of U.S. debt – is already losing its appetite for U.S. Treasuries. In fact, the world’s fastest growing economy has already admitted to stocking up on gold to hedge against the dwindling value of its dollar holdings.

With the Dollar Diving, China Turns to Gold

China bought less than a sixth of the Treasuries issued by the U.S. government in the 12 months through March.  That stands in stark contrast to the Treasury market of two years ago, when China’s demand for U.S. securities actually exceeded the United States’ own borrowing needs.

Additionally, when China has purchased Treasuries, it has done so by swapping them with other U.S. assets, rather than exchanging foreign currencies or commodities. China has increased purchases of short-term Treasury notes – those that mature in a year or less – while at the same time unwinding its position in Treasuries with longer maturities.

“They are worried about forever-rising deficits, which may devalue Treasuries by pushing interest rates higher,” JPMorgan & Co. (NYSE:JPM) analyst Frank Gong told The Associated Press. “Inside China, there has been a lot of debate about whether they should continue to buy Treasuries.”
As Money Morningreported in June, Treasury Secretary Timothy F. Geithner traveled to Chinato reassure the nation about the value of its holdings. But not everyone was convinced.

“I worry about details,” said Yu Yongding, a former central bank adviser who interviewed Geithner for the China Dailynewspaper. “We will be watching you very carefully.”

Prior to Geithner’s visit, Yu told Bloomberg News that he was hopeful for details on the U.S. plan to support the dollar. He also warned that despite its sizeable commitment to U.S. debt, China has other options.

“I wish to tell the U.S. government: ‘Don’t be complacent and think there isn’t any alternative for China to buy your bills and bonds,’” said Yu. “The euro is an alternative. And there are lots of raw materials we can still buy.”

One such raw material is gold. China recently announced recently that it has increased its holdings of gold by about 450 metric tons in the past six years.

“Gold is shifting back from a sovereign reserve asset central banks were inclined to underplay to one of growing, strategic interest,” said Trevor Keeley, global head of sovereign client services at the Anglo-Swiss bank UBS AG (NYSE: UBS). “This shift is logical; gold remains the world’s primary financial asset that is no one’s liability.”

And China’s not the only one loading up on the yellow metal.

Whether it’s through exchange traded funds (ETFs), or acquiring actual gold bullion, investor demand for gold continues to soar.

Individuals’ bullion purchases almost doubled last year to 862 metric tons, The Wall Street Journal reported. And while gold buying by investors has fallen from its 2008 peak, the volume still remains historically high. The 130 metric tons of gold purchased in the first quarter of 2009 is 50% higher than this decade’s average quarterly volume.

Of course, bullion isn’t the most practical way to get in on gold’s pending surge.

How to Stock Up on Gold

One way to stock up is to buy gold outright, either in bars, or though the gold-linked, exchange-traded fund (ETF) SPDR Gold Shares (NYSE:GLD). Today, SPDR itself holds more than 1,000 ounces of gold, and has a market capitalization of $33 billion.

The fund’s price fluctuates in concert with the price of gold, which adds a small mount of risk. On the other hand, however, buying this ETF is more convenient than buying gold bars directly, because the fund dispenses with the accompanying storage problems that comes with actually owning physical gold.

Buying stakes in gold miners is an excellent way to hedge against the enormous inflationary pressures filtering through the U.S. economy.

In this case, the Market Vectors Gold Miners ETF (NYSE: GDX) – composed chiefly of major gold miners – offers both company and geographic diversification, while including substantial leverage to the price of gold.  Market Vectors is based on the AMEX Gold BUGS Index(HUI), which represents a portfolio of 15 major gold mining companies that do not hedge their gold production beyond a year and a half.

Source: With Inflation on the Horizon, Gold Prices are Ready to Rally

On April 20, I recommended the iShares SPDR Gold Trust ETF (NYSE:GLD). Since then, it has surged more than 10%. And while the price of gold may experience some short-term pullbacks, the U.S. government’s overly expansive fiscal policy could lead to a sharp inflationary spike that makes this exchange-traded fund a must-have investment.

Given the “green shoots” of economic growth that have appeared over the past few months, it looks as though the economy has managed to avoid a very dangerous deflationary spiral.

Indeed, last year’s financial turmoil wiped out major financial institutions, left the housing market in shambles, and sucked all of the air out of an outsized commodities bubble.  U.S. Federal Reserve Chairman Ben S. Bernanke was right to fear deflation.

A deflationary spiral like the one that nearly took root the U.S. economy is the worst nightmare of central bankers, because once you fall into it, you can bring your interest rates down to zero and people won’t put money to work by spending or investing in projects at risk.  Investors realize that by simply sitting on their cash they are actually becoming “richer” since their money buys them more and more goods.

Central bankers and governments need to react aggressively and preemptively or else they risk losing 10 years of growth, like Japan did when its real estate and stock market bubbles popped in the 1990s.

That it is precisely why the Fed pursued such aggressive fiscal policy. Of course, prescribing inflationary measures as a remedy for deflation has its own risks, namely “reflation.”   Now, since the problem of inflation seems easier to contain than that of deflation, the great temptation is to put the pedal to the metal with both monetary and fiscal policies in order to ensure that the economy responds vigorously.  But then the trick is trying to coax the inflationary genie back in the lamp, so that the recovery is self-sustained.

Weaning the economy off of fiscal stimulus too fast might kill the recovery, but injecting too much stimulus into the economy will entrench inflationary expectations in the economy.  In the latter case, it would require higher-than-needed interest rates for a longer period of time, curbing output.

So, where are we now?

Interest rates are down to are range of 0%-0.25% and the Fed has implemented a number of inflationary programs, such as the Term Asset-Backed Securities Loan Facility (TALF), to make credit once more available and get the economy moving.  In addition, since the Fed Chairman Bernanke cannot reduce rates any more, he has resorted to a policy of quantitative easing.

Quantitative easing essentially is the practice of issuing money in order to buy assets.  With these programs, the Fed has bought commercial paper, mortgages, and Treasuries.  These programs are all simulative, and thus designed to prevent the deflationary bubble.

Other central banks around the world have taken similar measures to stimulate economic activity.  Throughout the industrialized world, there are different degrees of fiscal stimulus being deployed.  In the United States, Japan, and Europe, governments are saddled with decades of entitlements that cannot be sustained. And, as Milton Friedmanreminded us: “Inflation is a monetary phenomenon.”

In addition to the huge weight of entitlements and negative population growth, governments around the world are facing the temptation of resorting to “competitive devaluations.”  This is a situation in which a government deliberately undermines its own currency in order to make the relative prices of its economy more competitive globally.

A country essentially “borrows” growth from its trading partners with the hidden subsidy of an undervalued exchange rate that fosters exports and taxes imports.  But competitive devaluations do not work long term, because they create local inflation and inflation eventually eats away the competitive advantages obtained. That is, unless structural reforms to solve the underlying economic problems that led to the collapse are taken.

Hence, we have the three advanced economic blocks with fiscal and economic trouble incentivizing their economies with lax fiscal and monetary stimulus, and they all secretly would like their currency to fall against that of their trading partners, but cannot say it publicly.  We indeed have a covert “race to be last” between the U.S. dollar, the Japanese yen and the euro.  There’s also Chinese yuan, which Beijing has kept artificially low for about a decade.

To add fuel to the fire, the Chinese and the Russians have beencriticizing the U.S. Dollar and calling for some change or competition in its status as the world’s primary reserve currency.  Good luck.  The reality is that the flexibility of the U.S. economy allows it to readjust very quickly in a way that no other economy can.

U.S. Treasury Secretary Timothy Geithner hasreassured the Chinese about his intentions to withdraw stimulus from the economy as the recovery builds momentum.  And Federal Reserve Chairman Bernanke has testified before Congress that he is determined to reduce the long-term fiscal deficits.

While I do not for a second doubt their intentions, the reality is that U.S. and global policymakers are navigating unchartered waters, and economies do not change over night. It takes months for monetary and fiscal measures to take full effect.  By the time inflation becomes apparent, it may be too late to change course.

This is why investors must hedge their bets with gold.

Gold meets all the criteria to serve well as a currency: It is a reliable store of value, a medium of exchange, and a unit of measurement.

Gold is an asset that protects from financial meltdowns.  Witness its performance in 2008, when it was up 5%, while the U.S. stock market was down almost 40%.  And this is without any traces of inflation, but deflation, rather.

In the last few years, with the creation of the gold exchange traded funds, it has become even easier to buy gold, since the small management fee and instant liquidity of the ETF avoids the typical high custodial fees and trading costs associated with physical gold.

The market capitalization of the iShares SPDR Gold Trust ETF is hitting record highs.  And with the probability that something could go wrong in the global financial system and the risk that some inflation does indeed creep into expectations before policymakers act, investors need to have gold in a portfolio as a diversification tool.

The main reason, again is to cover ourselves from the unexpected global geopolitical risks, and at the same time ensure that we are prepared if inflation rears its ugly head.

The main risk to our investment is the International Monetary Fund’s  (IMF) commitment to sell gold out of its reserves. In fact, the IMF has already made the small concession to China and the Group 20: The IMF will sell 403 metric tons of gold to “provide $6 billion additional concessional and flexible finance for the poorest countries over the next two to three years.”

These sales will keep a lid on prices for some time and actually create some downward pressure. But that will be precisely the opportunity needed to buy in at a discount.

The Gold Trust ETF has appreciated some 10% in past three weeks, but ideally we need to see some more consolidation, down to perhaps the $900 levels before we continue to purchase up to our maximum of 5% or 10% of the portfolio, depending on your risk aversion.

Recommendation:  Hold existing gold positions in the iShares SPDR Gold Trust ETF (NYSE: GLD) and add to a maximum of 5% or 10% of the portfolio if we see gold-price retrenchment down to the $900 level (**).

(**) - Special Note of Disclosure: Horacio Marquez holds no interest in iShares SPDR Gold Trust ETF.

Source: Buy, Sell, or Hold: iShares SPDR Gold Trust ETF ]]> http://www.contrarianprofits.com/articles/buy-sell-or-hold-ishares-spdr-gold-trust-etf/17619/feed 0 http://www.contrarianprofits.com/articles/treasury-selling-as-much-as-1-trillion-in-bank-assets-with-fed-and-fdic/16909 http://www.contrarianprofits.com/articles/treasury-selling-as-much-as-1-trillion-in-bank-assets-with-fed-and-fdic/16909#comments Wed, 20 May 2009 17:00:56 +0000 Mike Caggeso http://www.contrarianprofits.com/?p=16909 The U.S. Treasury Department’s is pressing the go button on its Public-Private Investment Program and re-expanding the $1 trillion Term Asset-Backed Securities Loan Facility (TALF).

Treasury Secretary Timothy Geithner said to the Senate Banking Committee that he expects the programs to start by early July, Bloomberg reported.

“Working with the Federal Reserve and the FDIC, we expect these programs to begin operating over the next six weeks,” Geithner said in prepared testimony.

The Public-Private Investment Program is a coordinated effort with the Federal Reserve and Federal Deposit Insurance Corp. (FDIC) to help banks sell as much as $1 trillion in distressed mortgages and other assets.

Announced in March, the Public-Private Investment Program will be funded with $75 billion to $100 billion of U.S. Federal Reserve…

1.87 billion shares of Citigroup exchanged hands on Friday. That’s easily a record, not just for Citi, but for any stock in the history of the New York Stock Exchange. Shares in the company dropped almost 40%, to $1.40.

The former record holder WorldCom traded 1.5 billion shares on July 1, 2002. The S&P 500 set a bottom three months later.

But on this snowy Monday, during the winter of our discontent, a bottom seems unlikely anytime soon. The Dow opened down 100 points today, breaching the 7,000 level for the first time since 1996. On this leg down, if the Dow goes back to Greenspan’s original proclamation of “irrational exuberance,” it will hit 6,500. He first said those words on Dec. 5, 1996.

If the Dow continues to follow the Japanese example, a 27-year low would bring it all the way back to 1,000 during the life of this bear market.

“I don’t think the market appreciates,” says Dan Amoss, “how much the TALF could help restart lending.

“Last fall’s screeching halt in bank lending was greatly exacerbated by the crisis of confidence in securitization. Prior to the crisis, many of the consumer, business and mortgage loans originated by banks were sold into asset-backed securities and mortgage-backed securities.

“Securitization was abused to the point that it exacerbated the lending bubble; banks quickly reopened the lending capacity of their balance sheets as soon as they securitized loans and sold them to investors.

“Securitization lies at the root of the collapse in lending standards, but that’s another story for another time. Longtime Strategic Investment readers will recall my view, starting over two years ago, that reckless securitization would lead to major problems once investors noticed the toxicity of the asset-backed securities they were buying. It was the primary reason I recommended the UltraShort Financials ETF in July 2007.

“The comparison is not perfect, but depending on its success, the TALF could provide stability to the securitization market, or “shadow banking system,” much in the way that the FDIC guarantees stabilized the banking system during the Great Depression. This could lead to a rally in economically sensitive stocks that have been sold down to distressed levels.”

Considering Friday’s debacle for Citigroup, we’re not surprised to hear Abu Dhabi is “carefully assessing” its $7.5 billion investment in the bank.

The wealthiest of the UAE’s emirates, Abu Dhabi’s got a bit of a dilemma on its hands: Its billions in convertible bonds will convert to shares this time next year. Once the date comes, the bonds will convert between $31-37 a share… just a bit higher than Citi’s current $1.50 bid. That’s assuming, of course, that the U.S. government won’t wipe out all the shares by then via sudden nationalization. Either way, should add an interesting twist for the world’s largest sovereign wealth fund… and fifth largest petroleum exporter.

The mood in the market is as grim as our most famous investor. When he participated in the panel following the premiere of I.O.U.S.A., Warren Buffett shocked many of the film’s makers by playing the token Pollyanna. He all but dismissed the possibility that the U.S. faces a crisis of any kind.

Today, a scant six months later, Mr. Pollyanna is singing a different tune:

“The economy will be in shambles throughout 2009,” Buffett wrote in his annual letter to shareholders over the weekend, “and, for that matter, probably well beyond.”

The above is certainly the most headline worthy quote of his latest missive, and the one that’s got most Buffett disciples running for cover. But of course, there were plenty of little nuggets of wisdom in his yearly letter. Here are a few:

– “In poker terms, the Treasury and the Fed have gone ‘all in.’ Economic medicine that was previously meted out by the cupful has recently been dispensed by the barrel. These once-unthinkable dosages will almost certainly bring on unwelcome aftereffects. Their precise nature is anyone’s guess, though one likely consequence is an onslaught of inflation.”

– “Our long-avowed goal is to be the ‘buyer of choice’ for businesses –  particularly those built and owned by families. The way to achieve this goal is to deserve it. That means we must keep our promises; avoid leveraging up acquired businesses; grant unusual autonomy to our managers; and hold the purchased companies through thick and thin (though we prefer thick and thicker).”

– “Home purchases should involve an honest-to-God down payment of at least 10% and monthly payments that can be comfortably handled by the borrower’s income. That income should be carefully verified.

“Putting people into homes, though a desirable goal, shouldn’t be our country’s primary objective. Keeping them in their homes should be the ambition.”

– “The investment world has gone from underpricing risk to overpricing it. This change has not been minor; the pendulum has covered an extraordinary arc. A few years ago, it would have seemed unthinkable that yields like today’s could have been obtained on good-grade municipal or corporate bonds even while risk-free governments offered near-zero returns on short-term bonds and no better than a pittance on long-terms.”

– “When the financial history of this decade is written, it will surely speak of the Internet bubble of the late 1990s and the housing bubble of the early 2000s. But the U.S. Treasury bond bubble of late 2008 may be regarded as almost equally extraordinary.

“Clinging to cash equivalents or long-term government bonds at present yields is almost certainly a terrible policy if continued for long.”

Yet the U.S. government pumped $30 billion more taxpayer dollars into AIG this morning. The injection came as the doomed insurer announced a $61.7 billion quarterly loss.

That’s a record for any publicly traded American company and even bigger than the group anticipated a few weeks ago.

Last year, AIG lost just under $100 billion. That’s around $3,200 for every second of the year. We’re impressed. Losing that much money that fast takes talent.

Today’s injection brings Uncle Sam’s AIG tab up to $180 billion. In exchange, you own almost 80% of the company… that you’ll never see.

Two more banks failed over the weekend. The 15th and 16th failure of 2009 will nick another $100 million notch in the FDIC’s belt.

Consumer spending in the U.S. registered a surprise gain in January, the Commerce Dept. said today. After falling a record six months in a row, spending popped up 0.6% during the month.

At the same time, personal savings in the U.S. has shot up to 5%. That’s the highest level since 1995.

Hmmn….

The climbing savings rate explains this phenomenon too. The dollar index, still the ultimate flight to “safety” (sic) is just below 89 — its highest level since April 2006.

Investors are showing commodities no mercy during today’s sell-off. Oil is down $4 a barrel, now just clinging to $40. Even gold can’t withstand the pressure… it’s down almost $30, to $933.

“The U.S. had better start looking for someplace else to store its high-level nuclear waste,” declares Byron King, with today’s energy opportunity. “Because they won’t be storing the waste at Yucca Mountain, Nev. This week, the Obama administration announced that it will not support the 20-year-long, $10 billion project to store waste at Yucca Mountain, located about 100 miles northwest of Las Vegas.

“The new administration had better start an alternative soon, and move fast. Almost every one of 104 operating U.S. nuclear power plants are either out of room for on-site storage or nearly so. And then we have to deal with the many forms of nuclear waste generated in government labs and everyday nongovernment industry.

“This ranges from the U.S. nuclear weapons complex to the medical arena and things like metallurgical testing and oil well logging. The nuclear waste that comes from these activities presents a serious problem, with no solution in sight. Lack of storage is a key roadblock to the expanded use of nuclear power in the U.S. Every nuclear-related project needs to show how it will handle nuclear waste from cradle to grave. So what happens when there’s no grave?

“Canceling the Yucca Mountain project may feel good to longtime critics. Indeed, canceling Yucca Mountain may even be the right thing to do. We’ll find out over the next century or so. But right now, we have a problem. Where else to store large volumes of high-level nuclear waste? Any volunteers? No, I didn’t think so. All the wise heads at DOE and in the U.S. nuclear industry had better get their thinking caps on. And whoever figures it out will probably make some serious money.”

For more from Byron, be sure to check out his latest special report: How to Buy Gold for a Penny per Ounce.

“Your reader complains ,” writes a reader, “that letting the big banks fail will be more than ugly, that it will be Armageddon. I have spent hours a day online reading about this crisis, and have found not a single article explaining in any significant detail how this conclusion is reached. The Fed and Treasury refuse to disclose the extent of the problem for two reasons: 1) fear of spreading panic, and 2) fear of disclosing the banks’ ‘trade secrets.’ We’re even denied the knowledge of how our money has already been spent. Bloomberg and Fox News have both filed FOIA lawsuits that the Fed is fighting.

“It’s not enough to describe the situation as a ‘house of cards.’ Let’s open the process to daylight, bring in outside persons who are likely to question our existing authorities (I’d nominate Buffett, Roubini, Taleb and Santelli to start). Have this group perform the ‘stress test,’ not the idiots who couldn’t and didn’t see this coming. An audit by the people who are to blame for the problem is NOT going to restore public confidence, any more than would a urine test by Barry Bonds’ trainer.

“Indeed, when I saw the stress test parameters issued yesterday by the Fed, I concluded that Geithner has already peed in Citigroup’s cup.”

The 5: Charming.

At least we’re not in Europe, eh? This miniature Hooverville is parked outside the capital in Kiev.

We saw what happened to the rest of Europe last month when Russia and Ukraine had their little pipeline tiff… hard to imagine the energy crisis that would result from total economic failure.

“Central Europe’s refinancing needs in 2009 could total 300 billion euro, 30% of the region’s GDP,” declared Hungarian Prime Minister Ferenc Gyurcsany. He said over the weekend that the richer EU members should set up a $200 billion fund to help keep union alive. Germany has already rejected the bailout… France and Italy will likely follow.

“A significant crisis in Eastern Europe would trigger political tensions and immigration pressures. With a Central and Eastern European population of 350 million, of which 100 million are in the EU, a 10% increase in unemployment would lead to at least 5 million unemployed people within the EU…

“We should not allow that a new Iron Curtain should be set up and divide Europe.”

Across the English Channel, Europe’s biggest bank is in dire straits too. HSBC was forced to raise over $17 billion today after announcing its 2008 income crashed 68%. The bank will issue over 5 billion new shares, Britain’s biggest ever rights issue. The mega bank also announced a 29% dividend cut.

Source: A Bottom in Sight? Buffett Wisdom, Energy Crisis, Eastern Europe and More!

The president was under pressure to say who would handle the issue before tomorrow, when General Motors Corp. (GM) and Chrysler LLC must give progress reports on plans to restructure as a condition of $17.4 billion in U.S. Treasury loans. The so-called car czar – an approach that had some support in the American auto industry – was viewed as a key move in the federal government’s push to revamp the U.S. auto industry. The task force puts an end to reports Obama would recruit a well-known figure from outside to serve in that role, an approach that had some support in the industry itself.

Ron Bloom, a United Steelworkers union adviser and former Lazard Ltd. (LAZ) vice president, will join the Obama administration team, Bloomberg said of the alleged appointment, which has yet to be made publicly.

“There needs to be a trail boss here,” said Andrew Gross, chairman and chief executive officer of Automotive Consulting Services LLC in Clackamas, Oregon, told Bloomberg in a telephone interview yesterday. “Typically when you have a committee set up it provides cover. Everyone’s responsible, but no one’s accountable.”

Geithner has “got his hands full” trying to rescue the banking industry, Gross said.

After Congress failed to approve a bailout for the automakers, former President George W. Bush on Dec. 19 authorized the loans, a move that effectively made the Treasury secretary the car czar, imbued with the responsibility for making sure the companies meet deadlines and authority to revoke the loans.

Under the new plan, Geithner will remain Obama’s official “designee” to oversee the restructuring, meaning he’ll have the authority to pull back the aid if the automakers fail to submit a return-to-profitability plan by the established March 31 deadline.

“It’s going to be something that’s going to require sacrifice not just from the auto workers, but also from creditors, from shareholders and the executives who run the company,” senior White House adviser David Axelrod told NBC TV’s “Meet the Press” on Sunday.

Representatives from Cabinet departments and White House offices will serve on the task force, too.

Market Matters

So what will $790 billion buy these days?  Hopefully, a few roads and bridges, about 3.5 million new jobs – and perhaps an economic recovery for the country, too. President Obama is expected to sign the legislation today (Tuesday), The Washington Post reported.

But as the stimulus package moves closer to Obama’s signature, the jury is still out on its future success. Perhaps the sign of a successful compromise exists when neither party is completely satisfied (or not at all satisfied) and points out flaws in the final package.

In this case, budget hawks and other conservatives claim that the bill is a giant spending package that will do little to revive the economy, or create any real jobs. Many bleeding hearts and other liberals were counting on a larger stimulus and believe the tax cuts and rebates will not help and, if anything, similar actions over the past few years have contributed to the current mess.

President Obama seemed pleased with the progress and praised the plan as an “endeavor of enormous scope and scale.”  Then again, his views on effective stimulus may have cost him another cabinet nominee as his willingness to cross partisan lines to find a Commerce Secretary failed over insurmountable economic and ideological differences with Sen. Judd Gregg.

News from the bailout front grew more pessimistic during the week as Treasury Secretary Geithner’s initial attempt to win over Congress, investors, economists, and the media proved no more successful than Hank Paulson’s before him.  The stock market had run up significantly in the days leading to his speech, as folks hoped to hear some specifics about how the next round of the Troubled Assets Relief Program (TARP) (and other initialed programs like TALF) would work far better than the initial plan.  Instead, disappointed investors ran for cover when his remarks left many questions about the valuations of toxic assets and private/public partnerships unanswered.

As plenty of finger-pointing continued over the failed bailout initiative and its lack of direction, some signs of success from the U.S. Federal Reserve and Treasury Department’s moves have slowly emerged.  The once-frozen credit markets have started to thaw as corporations have borrowed almost $80 billion so far in 2009, issuing high quality bonds to take advantage of low interest rates: Cisco Systems Inc. (CSCO) alone sold $4 billion in debt securities to raise cash for potential merger-and-acquisition activities.

In other (optimistic) news, Intel Corp. (INTC) will be investing $7 billion in technology enhancements at its factories during these dire times.  McDonalds Corp. (MCD) showed that Big Macs are near necessities as same-store sales jumped by more than 7% last month.  Still, earnings season wound down with profits at Standard & Poor’s 500 Index companies projected to plunge over 30% in the fourth quarter, the worst showing in about two decades.  In fact, it was the first-ever quarter of negative earnings, MarketWatch.com reported.

Oil plummeted below the $34-a-barrel level (at one point) as inventories climbed to an 82-week high amid lower demand for energy during the downturn.  Investors unloaded stocks following the Geithner remarks (remember the old market adage: “Buy on the rumor, sell on the News”), despite some better-than-expected economic releases.

Bonds experienced a “flight to quality,” and also rose on news that a comprehensive foreclosure-assistance plan is in the works.

Economically Speaking

First the bad news. In the latest Wall Street Journal poll of top economists, the vast majority revised (downward) their outlooks for the second half of 2009, and said that the prospects for a full-fledged recovery seem much less promising.

While most predict that we’ll see some economic growth during the last six months, the rate of such expansion is lower than earlier projections. In fact, several economists expect that economic contraction will continue to be a reality through the end of the year.

But that brings us to the good news: These economic surveys are rarely on target.

Federal Reserve Chairman Ben Bernanke did his best Tony Robbins impersonation (the power of positive thinking), and highlighted the recent successes of certain policies.  Bernanke suggested that the commercial paper markets have benefited from the central bank’s decision to buy these short-term securities and more companies are meeting their liquidity needs.  He promoted the newfound stability among money-market funds as investors ceased the mass withdrawals that were occurring last year. Finally, he expressed relief that mortgage rates have declined dramatically and that borrowers have taken advantage of purchase and refinance opportunities (at least those borrowers with high-paying jobs and stellar credit).

While the trade deficit declined to its lowest level in almost six years, the pessimists claim that the improvement is more reflective of the recessionary times which have restricted domestic demand for the imports of oil and other foreign-made products and services.

Meanwhile, the imbalance with China climbed to an all-time high.  In retail news, sales in January surprisingly jumped by 1%, the first increase in seven months and the best showing in more than a year. While Wal-Mart Stores Inc. (WMT) took advantage of the consumers’ hearty appetites for groceries and other (discounted) necessities of life, buyers also hit the auto lots again to check out the “too-good-to-be-true” deals.  While the initial jobless claims actually fell slightly in the most recent week, the number of unemployed continuing to search for a job moved higher, an indication that the labor markets remain tight.

The foreclosure initiative will be of particular interest to many who believe the housing sector remains the key to any recovery. Investors also get the latest look at the inflation picture as both the producer price index (PPI) and consumer price index (CPI) for January will be released.  While oil has continued to plunge, gas prices seemed to have stabilized as of late (unfortunately for consumers) and talks of deflation may have been put on the backburner, at least for now

Weekly Economic Calendar

Source: Obama Administration Kicks the “Car Czar” to the Curb; Treasury’s Geithner to Take the Wheel

Surprisingly, two key ingredients of this turnaround formula will be structured investments, such as asset-backed securities, and leverage – the combination and poorly policed use of which acted as the accelerants that helped fuel the financial inferno that’s now sweeping the globe in wildfire fashion.

But the reality is that new U.S. Treasury Secretary Timothy F. Geithner probably realizes that he has little choice.

Nevertheless, there are problems throughout this plan, says Shah Gilani, a retired hedge fund manager and credit-crisis expert who is a contributing editor to Money Morning.

“Maybe I don’t get it because I’m not on the inside of the new Treasury fire-fighting team,” Gilani said. “But it strikes me that the part of the proposed plan to stimulate consumer loan growth by courting opaque hedge funds with an offer to lend them as much as $95 for every $5 they put up, at a giveaway interest rate, so they can buy new security pools of already overly leveraged consumers’ additional borrowing obligations, is like trying to put out a fire with gasoline.”

As Democrats and Republicans continue to tussle in Congress over a controversial economic-stimulus package worth an estimated $825 billion, Geithner will today (Tuesday) formally unveil a financial-markets rescue plan that’s going to be heavily reliant on private investors buying the “compromised” debt-backed securities that are clogging bank balance sheets like “plaque” clogs the arteries of a heart patient.

The plan Geithner is scheduled to outline represents a revamped approach to the $700 billion Troubled Assets Relief Program (TARP) announced by the Bush administration and then approved by Congress last fall. About half the money has been spent in that program, which was initially designed as a way for the government to buy troubled bank assets, but which ended up with the federal government taking direct stakes in the banks themselves.

TARP has been heavily criticized for its lack of accountability and lack of controls. As the ongoing Money Morning investigation has demonstrated, banks have used the money for everything from buying other banks to paying out bonuses – although they often refuse to admit it.

While most investors will refer to today’s proposal as another “banking bailout plan,” the reality is that fixing the banks is the end game, and not the actual strategy. The misconception is easy to understand; after all, most investors believe the credit crisis is due chiefly to a decline in lending, the truth is that this lack of liquidity is due to a decline in “securitization” – the process under which loans made on Main Street are bundled together and repackaged on Wall Street and then resold to investors worldwide as highly rated bonds.

Geithner, in a speech last year when he was still serving as the president of the New York Federal Reserve Bank, said the total value of assets in the “shadow financial system” – a system consisting of hedge funds, investment banks and financial “conduits” such as “structured investment vehicles” (SIVs) – outstripped the those in the traditional banking system as early as 2007.

That’s no surprise: Just one year before that (2006), securitization was for the first time responsible for more than twice the volume of loans being made by regular lenders, Mark Sunshine, the president of middle-market lender First Capital in Boca Raton, told Fortune.

Through securitization, a lot more credit could be created than when banks just originated loans and then held them on their balance sheets. This new reality substantially boosted the “velocity” of lending and credit growth, and provided much of the financing consumers needed to buy cars, houses and other wares.

Then came the subprime-mortgage debacle, which caused a shutdown of the shadow financial system and a virtual halt to lending.

According to First Capital’s Sunshine, between the first quarter of 2007 and the third quarter of 2008, bond issuance fell 93% in asset-backed markets, 73% in corporate-debt markets and 47% in mortgage-related areas. And without those asset-backed bonds being issued, lending dried up.

Bond issuance has “just fallen off the cliff,” Sunshine told Fortune. “The reality is that the banks don’t have the infrastructure or the capital to lend in the kind of volume to make up for the collapse of the credit markets.”

Though the problem is fairly clear, there’s no single obvious fix. When he makes his speech to unveil the latest bailout initiative today, Treasury Secretary Geithner is expected to announce a multi-pronged effort – including government guarantees of losses on some assets and greater assistance for troubled homeowners.

With Congress already angry about how much is being spent on rescue programs, Geithner must find a way to make the needed fixes, while keeping the final price tag as low as possible.

“We want to get the private sector to take responsibility for a situation that in many ways was created in the private sector,” Lawrence H. “Larry” Summers, a top economic aide to President Obama, told CNN yesterday (Monday). “If the government is going to be putting money at risk, we want to make sure somebody in the private sector is willing to take the same risk the taxpayers are being asked to take.”

Thus, to get the “shadow financial system” re-started, Obama administration insiders had to think creatively, and possibly accept a higher level of risk than taxpayers might realize or be comfortable with. That includes attracting private-sector investments – no easy task, given that the securitization market is still frozen, U.S. unemployment is soaring, and the American housing market remains in a free-fall.

“The administration is having to juggle three different chain saws,” Brian Olasov, a managing director at the Atlanta office of law firm of McKenna Long & Aldridge LLP, told Reuters. “The key question is, does the plan make it attractive for the private sector to participate?”

Geithner must generate support for a greater flow of investor funds into key areas such as the markets for mortgage-backed securities, auto loans and asset-backed bonds, Reuters said.

Olasov says plans like the U.S. Federal Reserve’s Term Asset-Backed Lending Facility, or TALF, hold great promise for jump-starting private credit flows. Under the TALF program, buyers of “AAA-rated” securities backed by credit cards, student loans and other assets can swap those bonds for U.S. Treasury securities that they can use to get new financing.
In The Fed created TALF as a $200 billion program back in November, but never deployed it, for it was too complicated to roll out that quickly.

Already, however, federal officials are considering expanding the types of securities eligible for the TALF, as well as related plans to include residential and commercial mortgage securities. That’s creating some real concern about the level of risk the federal government may be taking on, especially since the potential exists for private-sector investors to “game” – manipulate – the financial system, if the guidelines aren’t strict or specific enough, some experts worry.

Under the $200 billion TALF program, the central bank will loan money to virtually any U.S. firm that’s willing to use this government financing to buy securities that are tied to  auto, credit-card, small-business or student loans, The Wall Street Journal reported.

In other words, since the government doesn’t want to buy these securities itself, it is lending money to make it possible for professional investors to buy the securities – and in some cases is even guaranteeing payment on the loans that back these securities in order to make this happen.

Some hedge funds – the shadow-financial-system players that borrowed money to boost returns for clients – are “are lining up to get in on the Fed program, seeing a chance to make high double-digit-percentage returns with little downside using low-cost loans made on easy terms,” The Journal reported. Some Fed officials are admittedly nervous about relying on unregulated and often opaque hedge funds, but see the arrangement as a necessary trade-off to increase the velocity of lending and utlimately get capital into the hands of consumers.

“This is exactly what the financial system needs,” Andrew Feldstein, chief executive officer of Blue Mountain Capital Management LLC, a multibillion-dollar hedge fund that is gearing up to participate in the Fed program, told The Journal. “Sending help through the banking system is like sending an ambulance through a traffic jam.”

Others see big risks, however, since the program essentially combines the very same elements that led to the financial crisis in the fist place – leverage, asset-based securities, and questionable credit ratings on debt.

“Between setting up an aggregator bank to buy toxic assets that still no one has any idea how to value and setting up “foxy” hedge funds with their own henhouse of government-backed consumer-weary loan pools, it’s probable that the Treasury will succeed in bringing in private capital,” Money Morning’s Gilani said. “It’s just too bad that if the scheme actually works, it will be the rich-money hedge funds that win and if it doesn’t work, it will be poorer U.S. taxpayers that get their necks rung.”

Source: Obama Administration Must Revive “Shadow Financial System” to Revive U.S. Banks

Editors Note: This is the eighth installment of an investigative series in which Money Morning examines how U.S. banks are using federal bailout funds.

Another rally day in the currencies yesterday… One that wasn’t as pronounced as Monday’s 3-cent rally… But a rally just the same, and at one point, the euro was trading above 1.30… Hadn’t seen that level in a while, so welcome back to the 1.30 level, Mr. euro…

Someone sent me a note the other day, and said, why don’t you talk about Australia, Canada, and Swiss more? Hmmmm… Maybe they don’t read the Pfennig “every day”… But those currencies are in my notes most days, and if they are not, they are a part of the overall direction in currencies that are being pushed down by the Trading Theme… But in the spirit of the season…

Aussie dollars have rebounded nicely the last three days, but this is really putting a band-aid on a bullet wound, for the A$ has suffered a shot to the heart, and you’re to blame, no wait! They’ve gotten bashed, beaten and left for dead, by the unwinding Carry Trades, and Commodities price collapse. Large interest rate cuts by the Reserve Bank of Australia (RBA) haven’t helped the A$… And so… Until risk is back in the markets, driving commodities higher and bringing the battered Carry Traders back, the A$ will not be on the short list of currencies that can mount a rally VS the dollar… Should those two items come back with vengeance? Now that’s a horse of a different color!

The Canadian dollar is getting tarred with the same brush as the A$, only the main commodity pushing the C$ down is the price of oil… Now, this is a case of: Torn between two lovers, feeling like a fool… I would love to see the C$ rebound, but it needs a higher oil price to do so, and I’m not about to turn my back on lower oil prices! I love less than $2 gas!

Now there are those that would tell you that this current level of the price of oil is just a fleeting moment price, and that we’re still in store for $8 gas down the road… OK, I’m not sure I can get my arms around that, unless… We as a country do what we’ve done about gas driven automobiles for the last 35 years… Nothing, absolutely nothing! Then $8 gas is probably in our future… But it’s not now, and won’t be next week or next month, or even next year… Let’s all hope it’s not in our future at all!

The Swiss franc… Oh, where to start? The Swiss National Bank (SNB) shot an arrow into the heart of the franc last week, when they cut interest rates 100 BPS… Who would have thought that the SNB had 100 BPS of rate cut arrows in their quiver? But they did, and now francs are back on the block…. The “block” I’m talking about is the selling short block to fund Carry Trades, where they held court with Japanese yen, until the SNB began raising rates in 2007… Then the U.S. dollar took over, and that’s where we are now… Good thing for francs that the Carry Trade and risk Aversion is hanging over the markets like the Sword of Damocles right now…

You know… We’ve been stuck in this Trading Theme of investors buying dollars whenever the economic Tsunami looks deeper, darker and more dangerous, for so long now, I had to sit back and examine this current currency rally further for what it was… At first, I thought this was simply a case of the currencies rallying because the “light at the end of the tunnel was brighter” as witnessed by the large rallies in stocks, caused by the bailout of Citicorp… But, then if that was the “true case” we would have seen the yen get sold along with the dollar… And guess what? Japanese yen was rallying too, while the dollar got sold!

In short- it seems like the market is starting to realize that all the various stimulus packages and bailouts our “leaders are throwing at the problems our economy faces and recognizing that while they may or may not lead us to the promised land of no deep, dark, dangerous recession, one thing that is a certainty is they will need to be financed. And isn’t this the Big Problem for the dollar that I’ve talked about for over a year now? In the end, the reality will be that this is all negative for the dollar… And well, in the end, our fiscal well being.

Yes, I completely understand that Europe faces a similar challenge, but let’s face the facts here, Europe has a surplus, right now at least, and does not have the funding requirements that the U.S. does…

And finally, there’s the “other” thought… The dollar has gone a long way in a very short time erasing 5 years of gains from some currencies… It was about time that it paused for the cause…

So… In keeping with the thought about the stimulus packages and bailouts… The Fed and Treasury announced another round yesterday… You might want to sit down, and reach for your wallet, just to make sure it’s still there!

Here’s how the Wall Street Journal reported the news… “The U.S. on Tuesday stepped up its efforts to support strained credit markets through new programs aimed at boosting consumer credit and the market for mortgage-backed securities.

Under the Term Asset-Backed Securities Loan Facility, or TALF, the Federal Reserve will extend up to $200 billion in non-recourse loans to holders of asset-backed securities backed by consumer and small-business loans.

The Fed also said it will purchase up to $100 billion in GSE debt through a series of competitive auctions starting next week. It will also purchase up to $500 billion in mortgage-backed securities backed by GSEs, with the goal of starting that program by the end of the year.”

For those of you that didn’t experience “new math”… (HAHAHAHAHAHA 2+2 is still 4!) the tote board shows us that yesterday’s announcement totals $800 Billion in addition to what they already have in the hopper! Geez Louise, when will this all stop? The Fed’s balance sheet has grown by over $1.3 Trillion so far this year and could very well be turning Japanese once again! What am I talking about here? Well… You all know how I’ve been saying that the U.S. if following Japan’s model of the 90’s? Well… The Japanese added debt on to debt creating stimulus packages and bailouts too, and then lowered interest rates to zero, and the only thing left was targeting the quantity of money rather than its price. By that I’m trying to say that they didn’t care what happened to the yen’s value, they printed and printed… Oh brother! Here we go again! Are we doomed to experience a decade of deflation like the Japanese did?

I don’t think so… I think our deflationary period will be much shorter, and then on the other side of that, we’ll see inflation that will cause you to reach for your wallet again to see if it’s still there! This inflation will push commodities back into the limelight, and once again the dollar will be punished…

That’s my story, and I’m sticking to it!

OK… The data yesterday was more of the same-o, same-o, awful looking stuff… U.S. preliminary 3rd QTR GDP printed at negative -.5%, and Personal Consumption (which the Fed used to look at closely, but doubt they do any longer) fell to negative -3.7% from -3.2% in the 3rd QTR. And, the S&P/CaseShiller House Price Index fell another 17.4% in September from a year ago. The rot on the Housing price vine still has some additional deterioration to go, unfortunately…

The Data Cupboard continues to yield plenty for us to look at each day with a heaping helping of Personal Income and Spending for October today. In addition, we’ll see Durable Goods Orders for October, the Weekly Initial Jobless Claims, Chicago Purchasing Managers Index (manufacturing for that region), U of Michigan Consumer Confidence, and New Home Sales for October… Whew! My fingers are worn out after all that! HA!

But there’s more… I’ve been wanting to have a brief discussion about this for some time now, and each day I experience a loss of memory and forget to do so! What am I talking about, I hear you asking? Well… It’s Gold… And not just the price of Gold in dollars, which has rebounded nicely this past week… But to point out that Gold has been rising VS all the currencies. Which makes sense right? The dollar has pounded the currencies for 4 months, and Gold gets stronger in those currencies… It’s an interesting situation… So, Gold hasn’t sunk VS the other currencies like it has VS the dollar.

OK… Here’s the dilemma for the currency traders today… We’ve got all this data to deal with, and everyone is going to be trying to leave early today to get a head start on getting home for Thanksgiving… Will the lack of volume this afternoon cause wild swings? It has a history of doing so…

China has cut their internal interest rate to help stimulate their economy, which the OED lowered their forecast for China’s economic growth from 9% to 7.5%… Well… 7.5% still sounds pretty darn good, doesn’t it? Especially, when you consider that by the time the 4th QTR U.S. GDP numbers are printed (not until probably Fed 2009), they will show U.S. GDP to be a negative -5.0%!!!!!!

OK… Now that was a lot for the day before Thanksgiving, eh? I had better stop here, as I don’t want to get you stuffed before your Thanksgiving meal!

Currencies today 11/26/08: A$ .6480, kiwi .55, C$ .8175, euro 1.2960, sterling 1.5340, Swiss .8375, ISK 235 (really, this is the quote we received Monday!) rand 9.8880, krone 6.9530, SEK 7.9260, forint 201.30, zloty 2.9180, koruna 19.48, yen 95.40, baht 35.20, sing 1.5080, HKD 7.7550, INR 49.43, China 6.8285, pesos 13.37, BRL 2.3370, dollar index 85.38, Oil $51.60, Silver $10.29, and Gold… $816.84

Source: Maybe It’s Time For A Change?

This newest economic infusion follows a $700 billion banking system bailout package that was unveiled in late October. At least half the cash has been injected directly into U.S. banks and insurance companies, firing off a flurry of takeover deals – with more expected to come. And it precedes an anticipated package being designed by the new economic team that’s been assembled by President-elect Barack Obama. That package is still in its formative stages, but estimates of its ultimate size range from $500 million to $1.2 billion.

The $800 billion package unveiled by the Fed and Treasury Department yesterday consisted of several parts.

In one statement, the Fed announced it would purchase as much as $500 billion in mortgage-backed securities backed by the three government-chartered lenders: Fannie Mae (FNM), Freddie Mac (FRE) and Ginnie Mae. It will also buy another $100 billion in direct debt issued by those firms.

Beginning next week, the Fed’s primary lenders will auction off as much as to $100 billion of the housing-related debt. Selected asset managers will conduct purchases of as much as $500 billion of mortgage-backed security debt, hoping to have all those purchases completed by the end of the year.

“This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally,” the Fed wrote in a statement.

In a separate statement, the central bank announced the establishment of Term Asset-Backed Securities Loan Facility (TALF), a $200 billion program that will support asset-backed securities (ABS) – loans often taken for students, car owners, credit card holders and small businesses. One caveat: To be eligible, ABS exposure must be “newly or recently originated” by U.S.-based people and companies.

“Continued disruption of these markets could significantly limit the availability of credit to households and small businesses and thereby contribute to further weakening of U.S. economic activity,” the Fed said in its second statement. “The TALF is designed to increase credit availability and support economic activity by facilitating renewed issuance of consumer and small business ABS at more normal interest rate spreads.”

The Treasury Department will provide $20 billion of that from the $700 billion TARP initiative.

These packages are the latest in a series of aggressive rescue measures to unfreeze credit markets, but it also more than doubles the amount of debt the government is taking on.

“They’re trying to put funds into the system, trying to unfreeze these markets,” William Poole, the former St. Louis Fed president, said in an interview with Bloomberg Television. “Clearly, the Fed and the Treasury are beginning to take a large amount of credit risk.”

A Wider Target

Through TARP, the Fed’s initial efforts involved taking stakes in lenders – making investments of as much as $25 billion in such banks as Citigroup Inc. (C), in return for a special class of preferred shares that gives the government an ownership interest.

But instead of using the government money to resuscitate lending, banks are instead using it to gobble up weakened banks that didn’t get aid.

At the end of the day these buyout deals are bad ones no matter how you evaluate them, says R. Shah Gilani, a retired hedge fund manager, an expert on the U.S. credit crisis, and the editor of the Trigger Event Strategist, a newsletter that identifies trading opportunities emanating from financial-crisis “aftershocks.”

“Why in the name of capitalism are taxpayers being fleeced by banks that are being given our money to grow their businesses with the further backstop of more of our money having to be thrown to the FDIC when they fail?” Gilani asked. “Consolidation does not mean that bad loans and illiquid securities are somehow merged out of existence. It means that they are being acquired under the premise that a larger, more consolidated depositor base will better be able to bear the weight of those bad assets. What in heaven’s name prevents depositors from exiting when the merged banks continue to experience massive losses and write-downs? The answer to that question would be … nothing.”

These new federal measures focus on the wider target – the people and businesses whose collective debt defaults are hampering the lenders. Consumer spending accounts for 70% of U.S. economic activity. So any measures that induce consumers to spend could have an expansionary effect on an economic system that’s widely believed to already be in a recession.

“Nothing is more important to getting through this housing correction than the availability of mortgage finance,” U.S. Treasury Secretary Henry M. “Hank” Paulson Jr. said at a press conference yesterday, Bloomberg News reported.

And the onslaught on foreclosures have fueled a record decline in home prices, which actually dropped 17.4% in September from a year earlier, according to the S&P/Case-Shiller home-price index. Among the hardest-hit areas, Phoenix and Las Vegas lead with home prices falling 31.9% and 31.3%, respectively, The Wall Street Journal reported.

Miami, Los Angeles and San Diego were close behind, falling 28.4%, 27.6% and 26.3%, respectively.

Declining home and property values are crimping consumer confidence and, hence, spending.

Source: Fed Announces $800 Billion in Homeowner, Consumer and Small Business Aid