Another One Bites the Dust

Good day… And a Happy Friday to one and all! It’s not starting out to be a Fantastico Friday, but I’m sure that by the time the closing whistle blows this afternoon, I’ll be all about a Fantastico Friday! The reason I say it’s not starting out that way, is simply that it looks as though the bailout package is close to being a done deal. On a side bar… Have you noticed that the bailout package is now being referred to as the “rescue plan”? I guess the word “bailout” wasn’t sitting to well with voters… Better to scare the bejeebers out of them into agreeing with taking on $700 billion!

Of course, you’ve read it here, and eventually you’ll read it other places, but this $700 billion is chicken feed when compared to the total amount of toxic waste bonds that are on the books of banks and brokers… So… Not to make light of this, but I’ll start taking odds on when King Henry (U.S. Treasury Secretary Henry Paulson) comes back to Congress asking for more money for his “rescue plan”.

So… The markets seem to have had the wool pulled over their eyes folks… I say this because the stock jockeys are champing at the bit to get this bailout package passed, and the dollar bulls are coming out of the woodwork again, and they all think that this bailout package will be the “end-all” for what ails the U.S. economy. WRONG! Buzzzzzzzz, thank you for playing, there’s a nice parting gift for you at the door… Johnny, tell them what they’ve won!

The U.S. economic data yesterday was awful (more on that later), and still the dollar gains ground on false premises… At least that’s how I see it… And who’s had the better track record on all this, me or King Henry? I’ve been harping about “risk events” for over a year now, while he kept telling us: 1. That it was simply a subprime thing… 2. That the mortgage meltdown wouldn’t filter out into the rest of the economy… 3. That the housing price downward spiral had bottomed in August 2007… And  4. That the mortgage bill that he backed and billed as the “cure to what ails the U.S.” would correct our mortgage problems.

OK… Well, another one bites the dust… (You can hear that bass playing, and Queen singing that song, can’t you?) Last night, thinking about last night… Yes, another one bit the dust yesterday, as the U.S. government brokered a deal for JP Morgan Chase to purchase Washington Mutual’s (Wa-Mu) deposits, branches, etc. This deal makes JP Morgan Chase the largest U.S. bank by deposits… And Wa-Mu, at $1.9 billion, the largest U.S. bank failure in history!

The regulators seized the bank yesterday afternoon (West Coast time). But it all seems to be getting swept under the rug this morning. I’m shocked that the backers of the “rescue plan” aren’t screaming from the rooftops, “see, this is what we told you was going to happen if we didn’t get this passed quickly”. Dolts, all of them! Wa-Mu had been rumored to be the next shoe to drop on the “dead man walking” list of bad banks and brokerages for a couple of months now… And customers of Wa-Mu “knew” something was up, as they withdrew over $16 billion from the bank since September 16th!

OK… I could talk about the “cash for trash” plan all day long. I’ll get about a half hour’s worth of time on the radio this morning, as I have two radio interviews… First, the Rocky Mountain Network at 9:05 CT, and then WSAU (I forget where they are from, but with cable and radio streaming these days it could anywhere!) at 9:45 CT…

So… The economic data yesterday… Geez Louise, what does it take to get people’s minds back to fundamentals? Yesterday saw the data cupboard yield New Home Sales for August, which saw sales of new homes fall 11.5% to 460K units annualized in August (versus the 520K in July).

Add to the awful New Home Sales a little plummeting of Durable Goods Orders, and an increase of the Weekly Initial Jobless Claims and you have a rotten data day! Durables plummeted -4.5% in August and July’s previous lofty data saw a major downward revision! And Initial Claims spiked to 493K last week. While I’m sure that some of this spike in claims came as a result of the problems from Hurricane Ike, the trend in claims had been trending upward anyway.

You know… The Durables data tells me that all the snake-oil sales tactics to get the “rescue package” no wait, I’m not going to fall into their trap; I’m going to call this for what it is… A “bailout package”. I could call it what my friend Jim Rogers calls it… “Welfare for the rich” but, I’ll keep with bailout package… So, meanwhile back at the ranch, the Durables data tells me that the snake-oil sales tactics to get the bailout package passed is too much, a little too late… King Henry and Big Ben are so far behind the curve on this one, they couldn’t see a train coming straight for them!

Today, we’ll see the latest update to second quarter GDP, and U. of Michigan Confidence for the first two weeks this month. Regarding the second quarter GDP… I heard someone say last week that the U.S. economy was rebounding as witnessed by the strong second quarter GDP report… I thought that I had explained that one before! I guess the guy wasn’t a Pfennig reader! Recall, that the second quarter GDP was goosed, by exports… 3% of the 3.3% GDP number was export driven… And in the second quarter what did we have? We had the dollar falling to record levels against most currencies, that’s what! And since the end of the second quarter what have we had? A recovering dollar from those historic lows! So… GDP in the U.S. is not something to hang the economy’s hat on! When the total is “really” 0.3% and when inflation is running at a much higher level, you have negative growth!

So… The dollar is basking in the sun of the misguided souls that believe the bailout package is the end-all for what ails the U.S. economy. The euro (EUR) is trading below the 1.46 handle, and most others are following… Not the Japanese yen (JPY), and Canadian dollar (CAD) though… These two have not allowed the dollar bugs (I mean bulls) coming out the walls to weaken their levels versus the dollar! The loonie is being underpinned by Bank of Canada (BOC) Governor Carney, who spoke last night and said that the BOC had been appropriately accommodating, but that policy makers will need to revisit their projections, given the recent data.

Recall, that earlier this week I talked about Canada’s inflation and job creation both coming in much higher than expected, and that the BOC would probably need to re-think their rate cutting… I love it when a plan comes together!

I just read something that really opened my sleepy eyes… JP Morgan will be marking down the acquired loan portfolio from Wa-Mu by approximately $31 billion, which is the amount of credit losses related to bad loans… OUCH! I sure hope JP Morgan got a “deal” for taking on such a toxic waste loan portfolio! (I’m sure they did, folks… They didn’t get to be the biggest U.S. bank by accident!)

And before I head to the Big Finish, I have to tell you about a story that appeared on Reuters yesterday… China banks told to halt lending to US banks… Uh-Oh! Here’s a snippet for your reading pleasure… “Chinese regulators have told domestic banks to stop Interbank lending to U.S. financial institutions to prevent possible losses during the financial crisis, the South China Morning Post reported on Thursday.

The Hong Kong newspaper cited unidentified industry sources as saying the instruction from the China Banking Regulatory Commission (CBRC) applied to Interbank lending of all currencies to U.S. banks but not to banks from other countries.”

Don’t know if that news sent shivers up your spine, like it did mine…

Currencies today 9/26/08: A$ .8275, kiwi .6835, C$ .9655, euro 1.46, sterling 1.8415, Swiss .9195, ISK 96.17, rand 8.1425, krone 5.6610, SEK 6.6310, forint 164.50, zloty 2.3050, koruna 16.72, yen 105.30, baht 33.92, sing 1.4275, HKD 7.7740, INR 46.55, China 6.8430, pesos 10.79, BRL 1.82, dollar index 76.95, Oil $105.49, Silver $13.18, and Gold… $875.25

That’s it for today… I’m sure glad it’s Friday! I missed my little buddy’s (Alex) football game last Saturday, as I was traveling back from Dallas, so I’m looking forward to tomorrow’s game. Both my back-up’s for trading are out today, so I’m flying solo! (It’s a great excuse to get out of going to meetings!) Last weekend of the regular baseball season. WOW! Seems like just a month ago, the season started, and it was so darn cold! The summer zipped by! My visit to see my oncologist yesterday went well; he was very pleased with my scans, and my general look… He said I looked better than he could remember… Well, that makes sense, given the first time I saw him I was in a hospital bed after going through surgery, and every visit since I’ve been on cancer drugs! I don’t have to go back for three months! YAHOO! Time to go… My Friday is already looking better, and I hope yours is Fantastico!

Chuck Butler
September 26, 2008