Fed Cuts Rates, Housing Growth Forecasted Down Again, Chinese Pollution, Our Picks for 2008, and More!

Posted On Dec 11, 2007 By

by Addison Wiggin & Ian Mathias

  • Is recession around the corner? WSJ poll reveals surprisingly bad odds for the U.S. economy
  • Existing home sales rise… but a closer look and a stroll down memory lane shows a housing market still in trouble
  • More pain in the banking sector… Here come layoffs and another Abu Dhabi rescue
  • Chinese pollution spiraling out of control… The 5 examines two industries still showing no signs of restraint
  • Plus… our editors’ top picks for 2008

 

Thirty-eight percent of the economists in the U.S. agree with The 5 Min. Forecast … at least, according to poll results The Wall Street Journal published this morning.

The poll says 38 out of 100 economists think the U.S. economy will be in recession in 2008. That number is up 5% from last month’s poll. The same group of economic thinkers also drastically lowered their GDP forecast for this final quarter of 2007, from an annualized 1.6% down to 0.9%.

Of the economists surveyed, 96% thought the Fed would cut rates today. Most said by 25 points. This time, they were right…

As we were about to publish, the FOMC announced a 25bps rate cut, down to 4.25%. The Dow fell 200 points within minutes and the dollar was remarkably holding its ground… clear indications that traders had already baked in a 50bps cut. We’ll have plenty more to say in tomorrow’s 5 Min… stay tuned.

The pace of pending home sales crept higher in October, says the latest report from the National Association of Realtors (NAR). The NAR’s Pending Home Sales Index rose slightly from September-October — from 86.7, to 87.2.

While they were at it, the NAR revised their annual sales forecast… again.

For the ninth consecutive month and, by our count, the 10th time this year, the NAR lowered its 2007 existing home sales forecast, this time down to negative 12.5%. We’re officially calling BS. Making a 2007 forecast in the middle of December is lame enough… but when it’s your 10th revision in 12 months, it’s not even fair to call it a forecast. Not to mention…

For nostalgia’s sake, let’s see how the NAR began the year: “It looks like we’re moving beyond the low for the housing cycle last fall,” said David Lereah, NAR’s chief economist back on Jan. 10, “and buyers are responding to historically low interest rates and competitive pricing by home sellers. In addition, a tightening inventory of homes on the market is supporting prices.”

Days later, he and the NAR forecasted existing home sales to grow 1.5% in 2007, “despite all the doom-and-gloom stories and dire predictions.”

Heh.

Overall, the index is down over 18%, compared with October 2006 — one of the biggest year-over-year drops since the month following the Sept. 11 attacks.

But it looks like traders aren’t reading the fine print. The headlines read “Existing Home Sales on the Rise”… and that, coupled with the seemingly imminent FOMC rate cut, sent stocks into positive territory yesterday. The Nasdaq and S&P 500 rose nearly a percent.

Twenty-six of the Dow’s 30 components gained, for a day-end rise of nearly half a percent.

Gold held almost perfectly steady at the $807 mark overnight in Asian and London trading. As the metal hit New York this morning, we didn’t expect much action until after the FOMC released their decision.

The dollar, too, awaited Bernanke’s guidance.

Washington Mutual reported more subprime-related strife after the bell yesterday. The bank announced plans to cut their dividend to 15 cents a share, fire about 3,000 people and sell $3.7 billion of WaMu stock.

Any other year, this would be the story of the month. In 2007: stretch… yawn.

It looks like JP Morgan may be the next sovereign wealth fund (SWF) target, too. According to today’s New York Post, JP Morgan’s executives have recently met with the heads of Abu Dhabi Investment Authority and the Investment Corp. of Dubai to discuss what bank spokespeople call “mutual cooperation.”

You may recall JP Morgan’s recent $1.3 billion write-down… and you might also remember Abu Dhabi’s recent $7.5 billion cash infusion to rescue Citigroup. We suspect JP Morgan is looking for the same sort of “mutual cooperation.”

We wonder… how long until we can buy gas at the bank’s drive-through window?

Vladimir Putin announced yesterday that he would back Dmitri Medvedev, one of his proteges, in the next Russian presidential election. This morning Medvedev, who has almost zero political experience, announced that if he were to be elected, he would place Putin in the role of prime minister.

“It’s now all but certain that Medvedev will win,” Dan Amoss of Strategic Investment fame tells us. “Putin is manipulating Russian politics so he can control the government from behind the scenes after stepping down in March 2008.

“I doubt it’s a coincidence that Medvedev is also the chairman of state-controlled natural gas behemoth Gazprom. As a monopoly exporter, Gazprom can dictate terms to European gas consumers. I’m confident it will keep raising export prices substantially. It must, in order to fund the aggressive drilling program necessary to offset declining gas production at older fields.”

If Dan’s forecast comes to fruition, the Strategic Investment portfolio is already positioned to profit … take a look.

In a shocking trade development (sarcasm all ours), China and the U.S. signed 14 agreements and memorandums during the Sino-U.S. Joint Commission on Commerce and Trade today. The agreements, mostly involving food, drug and consumer product imports from China, seem largely aimed at smoothing over this year’s wave of tainted goods entering the U.S. from the red nation.

Also included was an agreement that “requires” China to bring more Chinese tourists into the U.S. Call us crazy… but we didn’t know there was any sort of Chinese tourist shortage here in the states.

In a similar effort, China also opened its largest “free-trade harbor” today. The Dongjiang Bonded Harbor Area, according to Chinese PR folks, will enjoy the most favorable taxation and exchange policies in the nation and also offer all sorts of international logistics aid to foreign visitors.

With their booming economy, the Chinese are wreaking havoc in markets all over the globe. Chinese demand for Christmas trees, for example, is causing a sudden price run-up in Germany.

Huh? Yeah, that’s what we thought too.

According to the German rag Der Spiegel, American-style Christmas decorations have become a twisted status symbol in China, and demand for holiday evergreens has gone through the roof.

“We don’t have enough goods to keep up with Chinese demand,” a German tree farm owner told the paper. Nordmann firs, the most popular among foreigners, are being shipped to Asia and the Middle East at unprecedented rates. Twenty-eight million trees were sold in Germany last year… that number is expected to increase dramatically this year.

Weird.

The Chinese trucking industry is out of control, too.

 

Chinese shipping trucks will wait at some gas stations for hours to get only a few gallons of diesel. Surging demand has forced the Chinese government to install rationing programs across the country.

According to The New York Times, the diesel fuel burned by trucks all over China has been found to contain more than 130 times the pollution-creating sulfur that the U.S. allows in its shipping vehicles. An estimated 10 million of such trucks are currently in service in China. Do the math…

“Woah!” Cries our oil man Byron King. “China is creating a long-term health disaster, with respect to pulmonary disease. People by the hundreds of millions are sucking those fumes every day. China could face a genuine lung cancer epidemic in just a few years.”

Yet China’s appetite for pollution seems far from unquenched. China’s coal demand is expected to rise by up to 8% next year, reports the China Coal Industry Association this morning. Coal isn’t exactly the cleanest fuel on Earth, and as you might guess, China doesn’t seem to care:

 


A Chinese coal miner… that ain’t shoe polish

 

“Like the U.S., China is not party to the Kyoto Protocols on greenhouse gas emissions,” Byron says. “And thus, the CO2 emitted by China’s growing fleets of coal plants is not under any sort of international regulatory regime.

“The rest of world, including other developing countries such as India, would have to reduce its collective CO2 emissions by over 50% within less a decade just to match the now-outdated 1990 Kyoto emission levels. Well, there are few things that are certain in this world. But one of those certainties is that such a situation ain’t gonna occur, no way, no how.”

Editor’s note: We’ve been tracking global coal consumption incessantly. Byron’s recently made 30% on one of the U.S.’s best coal producers. Chris Mayer’s Special Situations readers just picked up an undervalued coal emissions reduction company. And Dan Amoss just closed out 25% gains by selling coal giant Peabody Energy.

You could receive all those recommendations, plus hundreds more, by subscribing to each individual publication. Or you could join the Agora Financial Reserve and receive all of our publications for one price… for life. We’ve thrown open the door to the Reserve for a year-end membership drive. You can capitalize on this opportunity right now, here.

The ZEW German business sentiment report showed German investor confidence at a 15-year low this morning. Ouch.

“The fellow who asked if you were ‘out to lunch’ is out to lunch himself,” says one reader, in response to yesterday’s reader mail. “His economic viewpoint is all too indicative of how the majority of people see the world (at least the ones I come in contact with). They incorrectly think the ‘government’ has a magic pot of money at its disposal to hand out when it finds people in ‘plight.’ They fail to comprehend the obvious; any ‘help’ the government gives out must first be confiscated from someone else, and of course, the government takes its cut!

“I pray this bailout does not come to fruition. Obviously, we should DIScourage the idiocy that has taken place recently in the residential real estate sector, not ENcourage more idiocy in the future by bailing these folks out. They will be much wiser if they feel the pain of their bad financial decisions. I can testify to that!

“I applaud your efforts to educate the world about the dangers of excessive debt and speculation. You and the other folks at Agora remind me that there are some other sane people in the world, so all hope is not lost!”

“Hank Paulson’s ‘plan’ is just a tactic to defer the looming/growing reset crisis past the U.S. elections,” writes another, with a cynical view of the plan, “and to create enough ‘hope’ of a bailout to keep financial companies from having to engage in even more write-downs over the coming four-six quarters. So long as there is a credible plan in play, the banks can use their ‘judgment’ to avoid the inevitable write-downs. And by judgment, you can be sure that Hank is making the rounds, getting top-level commitments to keep the real numbers out of the papers and the markets from melting down.

“Once the plan gels, I’ll bet we’ll have a new term — ‘own to rent’ — with zero amortization loans for our happy homeowners and a new form of senior secured debt held by Resolution Trust Corp. II. [RTC was the firm set up to bail out failed S&L companies after the last real estate meltdown].

“Will it be managed off the government’s books by Goldman Sachs? There won’t be any foreclosures now, just forced sales in five-10 years, after everyone has forgotten, as RTC II seeks to realize a return. RTC II gets the first proceeds of any sale, making an innocuous 8-10% on its slice, and then the original loan is repaid, and then the homeowner makes their ‘equity’ back… Goldman Sachs has probably got the paperwork ready already…”

The 5 responds: How did you come to such a dismal view of the financial world? Goldman Sachs and the administration would surely have your best interest in mind if they were to move forward on a plan such as this.

Regards,

Addison Wiggin
The 5 Min. Forecast

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