New Government Deceit, Walker Resigns, Northern Rock Nationalized, Private Equity in India, and More!

Posted On Feb 19, 2008 By

by Addison Wiggin & Ian Mathias

  • Markets back on the rise… but a long-term trend is yet to reverse
  • On the verge of recession, U.S. government moves to shut down economic stats site
  • U.S. comptroller general resigns… how Walker’s new role will affect you, and maybe I.O.U.S.A.
  • U.S. banks borrow $50 billion, U.K. bank gets nationalized… more proof the “credit crisis” is far from over
  • Private equity giant sets up shop in India… Mayer on how to play the trend

 

Traders left early Friday in an attempt to avoid the three-day-weekend traffic out of NYC. Consequently, stocks have done next to nothing for the past three days. Despite recent U.S. market rallies, we open with this important trend to keep in mind:


In economic news, the Department of Commerce (DOC) has decided to shut down its popular economic indicators site “due to budgetary constraints.” Hmmmn…

The site, economicindicators.gov, is perhaps one of the only truly useful and simple sites run by our government, and has been widely used by the media, investors and economic geeks like your editors for quite some time.

“No data series are being discontinued,” writes the ever vigilant John Williams, “but Uncle Sam is making it more difficult for the public to access the data easily, at the same time that a politically uncomfortable recessionary inflation is starting to surface in official reporting.”

Funny how that works, eh? Bush proposes the first-ever $3 trillion budget this year, but there’s not enough porked in to keep a stats Web site running.

Never fear: Mr. Williams says he plans to keep publishing these stats. We’ll let you know when his efforts are up and running.

If you missed our overtime briefing on Friday, David Walker resigned from his position as U.S. comptroller general.

“As comptroller general of the United States,” says David Walker, the federal government’s top accountant, “there are real limitations on what I can do and say in connection with key public policy issues, especially issues that directly relate to GAO’s client — the Congress.”

Walker left his government post to lead the newly founded Peter G. Peterson Foundation. As the head of the Peterson Foundation, Walker will oversee the billion-dollar endowment of Pete Peterson — former commerce secretary, the founder of the Blackstone Group and the Concord Coalition and legendary advocate for government fiscal responsibility. Chief among Walker’s duties at the Peterson Foundation will be the funding and advocating of projects that will enhance public awareness of fiscal imbalance, government deficits and nuclear proliferation.

We’re hoping that I.O.U.S.A., in which Walker plays a distinct and prominent role, will be one of those projects. We’ll keep you updated either way. For the full story, check out the “overtime briefing” we sent on Friday.

American banks borrowed $50 billion from the Federal Reserve since the beginning of February, reports the Fed yesterday. In addition to the $30 billion of short-term loans issued by the Fed on Feb. 12, we learn today that an extra $20 billion was auctioned off in the reserve bank’s recently spawned “Term Auction Facility.” Such auctions allow banks to quietly borrow short-term capital at rates below the Fed’s benchmark rate.

The Fed’s TAF has been a big hit with struggling U.S. financials since its inception late last year. By our estimate, banks have borrowed over $150 billion in freshly minted bills since the Fed’s first auction in mid-December.

Of course, no one knows which banks borrowed how much, when they borrowed it, or especially, why they need billions in urgent financing… that’s the “beauty” of the TAF system. You’ll have to wait for first-quarter earnings reports. Brace yourself.

Barclays, the U.K.’s third largest banking group, announced a $3.2 billion write-down this morning. Unlike many of its global banking counterparts, Barclays managed to profit in 2007… by about $8.6 billion, down 3.4% from 2006.

The U.K. bank Northern Rock, the feeble run on which we covered back in September, will be nationalized.

Alistair Darling, Britain’s answer to Hank Paulson, announced this weekend the bank was placed in “temporary public ownership.” No amount of private interest could keep Northern Rock from going under, not even the braggadocio of billionaire Richard Branson. Thus, the U.K. treasury is tasked with managing Northern Rock’s $222 billion in assets, 6,500 employees and God-knows-what liabilities, bad loans and subprime related losses.

The dollar continued last week’s losing streak this morning. The dollar index lost its grip on 76, fueled entirely by euro strength. The euro has regained $1.47 and sits now about a cent a half below its all-time high.

Elsewhere, the loonie shed a bit, down to 98 cents. The pound still can’t catch a break… it fell to as low as $1.94, despite the dollar’s recent weakness. The yen’s been stuck at 107 since last week.

Gold is off to the races this morning, gaining $15 in foreign trading, to $925 as we write. We mentioned gold’s recent consolidation last week… if the yellow metal edges past its previous high of $936, we wouldn’t be surprised to see a big upside swing past $1,000 — its next big psychological barrier.

Oil shot up itself yesterday, to just below $96 a barrel. In response to slowing demand, OPEC officials are said to be discussing a production cut prior to their March 5 meeting. As we glance at the ticker this morning, we see light sweet crude going for over $98. Yikes…

“We don’t have plans to stop sending oil to the United States,” announced the always entertaining Hugo Chavez yesterday, a week after threatening to do just that.

Hugo thought he had spooked markets last week by cutting off Exxon’s oil supply and hinting at an “economic war” between Venezuela and the U.S. But as it turns out, all he did was damage the Venezuelan economy.

Apparently, Hugo’s hero, Fidel Castro, is no longer president of Cuba, either. Yawn.

Private equity giant Kohlberg Kravis Roberts is opening an office in India.

India received $1.2 billion in private equity investment this January alone. The second largest recipient, China, received about half that much. Japan, a distant third, pulled in about $309 million. India attracted more private equity dough last year than all other Asian nations combined… at least $9.9 billion.

“One thing investors may not appreciate,” writes our in-house India bull, Chris Mayer, “is the many fragments that make up the Indian economy. It’s like the early 20th century in America, where you had hundreds of auto manufacturers.

“The overall value of India’s stock market as a percentage of the size of the economy is tiny. The vast majority of businesses are in private hands. So as this development with KKR shows, there’s plenty of room for private equity investment. One strategy: Find public companies, take them private and eventually make a big profit.”

KKR, the world’s second most recognizable private equity firm behind Blackstone, adds Mumbai to its list of offices in New York, California, London, Hong Kong and Tokyo. If you think you can hang with these dealmakers
, KKR is still looking for someone to lead the group.

If not, we published Chris’ report on investing in India last week. It includes two ways to ride the coattails of two of India’s most successful families and is still incredibly affordable. Check it out here.

Care to place a wager on the gaming industry?

Market Vectors recently debuted a “Gaming ETF”
that will track the performance of 69 global companies that are “engaged in the gaming industry, including casinos and resorts, equipment and technologies, sports and race wagering, online gaming and horse racing.”

The ticker is BJK. Bonne chance.

“Excuse me for wondering,”writes a reader in response to the total cost of the subprime fiasco to date, “but how does $7.7 trillion just simply vanish?”

“Did someone pile all this up and put a match to it? I would think that if the banks/lenders wrote out checks to people for all that money, the borrowers who received those checks probably cashed them and put it under the mattress (safer than a bank) or bought another house in which a check was made out to the seller, who then went onto cash them, put them under a mattress… you know the rest.

“Anyway, someone at the end of the line had to end up with the money, the $7.7 trillion, right? Or was everything written with vanishing ink?”

The 5 responds:
Well, speaking of gambling… If a loan is given to buy a piece of property based on its “market value”… and then the market value drops and the borrower can’t pay the money back… the property goes into foreclosure and the lender has to write off the loan. This has been happening to the tune of billions upon billions. Likewise, if you put your retirement money in a fund invested in mortgage-backed securities… and then get a notice from the bank that they can’t determine the value of those funds… watch out.

Remember the tech wreck, when people were paying hundreds of multiples for tech stocks with no earnings? Same scenario. You pay $70 for a stock that drops to 30 cents… your money vanishes. Nobody gets paid. The left hand giveth what the right hand taketh away.

Cheers,

Addison Wiggin
The 5 Min. Forecast

P.S. We got word this morning that a Korean publisher has bought the rights to publish Gold: The Once and Future Money… and our French partners are translating The Demise of the Dollar, the second edition, into Gaul. Like the tree that fell in our yard last week, we have no particular reason to mention these items. We just find small details interesting. And thought you might, too.


Other Articles In 5 Min. Forecast