Agora Financial’s Rude Awakening

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Dubai, UAE

• The Dow swings another 241 points…and we’re supposed to be surprised?
• Investors get complacent just when the going gets tough,
• Mail floods in from I.O.U.S.A., the film hits Denver and plenty more…   

Joel Bowman, reporting from Dubai in the Persian Gulf…

“Another day, another blister,” as your editor’s father would say.

The market copped a shellacking yesterday. The Dow Jones Industrial Average ended the session down 241 points. The S&P 500 and the Nasdaq also floundered to finish down around 2% each.

What happened? It was all going so well, wasn’t it?

The Dow ended last week’s three-day rally with a 191-point gain. Oil was said to have retreated back to “normal” levels after all those nasty speculators were scared off. The dollar rallied, gold fell and the stars in the bull’s eyes seemed to have aligned. Armed with short-term memories and whistling the tune from the evening news, investors must have thought they were out of the woods.

By Friday’s close, the Chicago Board Options Exchange (CBOE) Volatility Index (^VIX) had dropped to its lowest level in three months. The index, also known as Wall Street’s “Fear Gauge,” indicates the market’s expectation of 30-day volatility by using the implied volatilities from a range of S&P 500 index options. A reading above 30 usually means fear has struck the heart of investors. They expect a wild ride over the next month, in other words. A reading below 20 typically represents a pretty relaxed, perhaps even complacent crowd.

On Friday, the VIX dipped to 18.67. Apparently, investors felt so comfortable with the smooth sailing ahead that they placed their bets and headed out to hit a round of golf for the weekend.

Anyone expecting a calm ride was in for a shock when they sauntered into the office yesterday. Data from the National Association of Realtors revealed that as home prices continue to fall, inventory levels are swelling. The number of homes and apartments for sale jumped 3.9 percent in July, according to the NAR’s figures, spelling more price slides to come.

Meanwhile, over in the plagued financial sector, whispers that Lehman Brothers had lured a buyer in Korea Development Bank were cast into doubt when the country’s top regulatory watchdog cautioned the state run bank over the risks of “going global.”

“At this time, as risks are also big, KDB should take a cautious approach,” said Jun Kwang-woo, chairman of the South Korea’s Financial Services Commission.

“It may not be proper for state-owned financial institutions to lead the role and take on excessive burdens,” he said.

The jilted Lehman led the financial sector lower, shedding 6.6% on the way to a close at $13.45. (For perspective, the outfit kicked off the year just above $62.) Goldman Sachs and JPMorgan also followed suit, dipping 2.57% and 4.04% respectively.

And now we read that Tamasek Holdings, the $130 billion Sovereign Wealth Fund out of Singapore, reckon the credit crisis will last out another two years.

No, investors are a long way from out of the woods just yet.

As for all Mr. Market’s erratic kicking and screaming, we’re just amazed that people are still amazed by it at all. Over the past month the Dow has posted triple-digit swings on nine separate occasions. In fact, the average daily move for August now sits somewhere north of 130 points.

The backdrop to all this is chaos in the financial sector, ongoing housing woes, mounting national and personal debt, epileptic swings in commodities, Fed-sponsored bailouts, wars waged over crucial oil pipelines, Fannie and Freddie’s continuing fiasco…the list goes on…

It would hardly seem the environment in which to let down one’s guard. Then again, the complacent man usually finds little resistance on the road to poverty. We’re sure Sun Tsu said something about this somewhere…or maybe it was Mr. Miyagi from the Karate Kid. Either way, going to war (or golf, for that matter) without a strategy is a surefire way to avoid victory. 

Perhaps, as Eric mentioned last week, it might be time to sell risk and buy caution. Gold might be a good place to start, and it’s pretty cheap right now. Just a thought…

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And from here, Rude reader, we depart from your usual programming to offer our congratulations to colleagues and friends, Addison Wiggin and Kate Incontrera, for the spectacular success of their documentary, I.O.U.S.A.

After kicking off their “debt doco” in theatres around the country last week, the pair headed out to air the movie at the Democratic National Convention in Denver. (Before you take a “partisan politics” swipe, they’ll be doing it all over again for the GOP come September.)

The movie has stirred up a maelstrom of debate surrounding the national debt. Who’s responsibility is it? What’s to be done about it? Ect, etc…

If you haven’t yet seen the flick, perhaps a couple of reader emails might pique your interest…

First up, this one from John in Seattle…

IOUSA was excellent on all counts, but a week later I wonder whether the momentum will be lost. 

In the Seattle screening, people were so agitated and motivated it seemed they were ready to storm Congress, had the building not been situated 2,300 miles away.  Unfortunately the event did not equip movie-goers with the tools to tap into their personal networks and spread the word. 

Here I am, telling everyone I know they should see the movie, but it’s not playing in any local theaters.  I have nothing else to offer them. I wonder if too much time was spent making the movie, and not enough time thinking about how to turn it into a grassroots phenomenon. 

Which raises my next question…even if by some miracle we all acquiesced to higher taxes to pay down our debts, what is to stop the Congress from going on a spending spree? Nothing, which is why it will take a heart-stopping crisis for Congress to actually take action on the debt. 

And another from Robert in Canada…

I wonder if we’ll see I.O.U.S.A being promoted by teacher’s unions across North America and kids forced to watch it in their classrooms? Like they did with Al Gore’s movie.
 
Oh I know the answer…….No.
 
That says a lot about where we are and where we are likely going.

From Mr. Edwards in Oregon…

My wife and I viewed the movie (IOUSA) in Medford, Oregon In a theater with about 85% occupancy.  Of particular interest was the percentage of persons under 40. 

We were disappointed that, in response to a query concerning ‘what can we do’ the answer was essentially to become informed. That is pretty broad and not much help. 

I feel that to suggest an analysis of each of our representatives’ voting records as related to the Constitution and to our own sense of right and wrong and fairness would have been a worthwhile and usable suggestion. The possible unintended consequences that seem to lurk around so much Congressional efforts deserve exposure.  Perhaps a web site could provide a convenient vehicle for interested parties to pursue pertinent evaluations of members of Congress.

Thanks for the viewing opportunity and for continuing to keep us all informed as to what is happening in the world

And this one from Art in California…

I saw I.O.U.S.A. in San Jose California
 
The theater was surprisingly filled for an boring dry financial flick most people would think? Obviously it was not and quit entertaining. I being a 5 reader and investor knew allot so I brought 5 members of my family who mostly don’t understand when I try to explain to them so this movie was for them. The rolling penny graphs over time were cool!
 
I know of several other people who wanted to see it but couldn’t. So the one night only at select theaters restricted your success, I imagine. Too bad Peter Schiff wasn’t on the panel. He would have set Warren Buffett’s whiskers on fire! Dave did well to drive the wooden stake though Warren’s Pollyanna heart. Warren’s not used to being questioned or over ridden in opinion I guess - he squirmed allot, Dave was serious!
 
Warren came off as “an aloof too rich for too long out of touch old guy”. I respect his savvy as being the best investor alive, but he’s shamefully out of touch on the crisis. His words were too deceptive but, like other readers said, he was too Pollyanna. Too bad he wasn’t drunk so he could have an excuse for his performance. Everyone I talked to said the same: his world is not ours.
 
This movie is a warning to the working man about to get stiffed on his paycheck, government over taxation and M3 monetary inflation in the near future. The public is angry and I’m sure we’ll see the waves come this November. All the best will be looking for the DVD. Everyone I know has nothing good to say about Washington or its leadership voids and frankly people here are ready for a revolution!

And, finally, some thoughts from Brandon from… er, somewhere in the country…

I’m only commenting on Mr. Buffett’s comments in detail, but the movie was good. I think he missed something crucial when he was reassuring the masses that we would all have our SUV’s in 2020. He said that China can’t dump the dollar so we shouldn’t worry.

Thank you Mr. Buffett, NOW I’m reassured.

Now can I ask what happens when China, rather than dumping the dollar for another currency, decides to buy resources or goods from America with all those dollars? It’s hard to feed 1.3 billion people.

What happens during a shortage of food, or anything else for that matter, when the Chinese just start buying whatever they’re short on from us in dollars? Prices go way up because they’re outbidding us and there are now more dollars floating around here in the states so we get an inflation double-whammy. So they buy rice, oil, wheat, steel and coal from us so they are still running and all we’re left with to burn and eat are little green pieces of paper.

Problem: my car doesn’t run on those and I don’t find them tasty.

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[Rude Endnote: According to Ian Mathias, Addison’s co-pilot over at the 5-Minute Forecast, early numbers indicate that last Thursday’s screening was a huge success.
 
“With the data we have so far, attendance exceeded projections by about 50%…It’s still too early to tell if we’ll stay in theaters around the country, but the powers that be have decided to keep the film showing in at least 10 major cities while the data is still flowing in.”

If you missed the movie but are still interested in what all the fuss is about, click here to see where it’s playing this week. You can also check out the trailer right here.

Ian will be along shortly with the midday wrap from The 5, including updates on how yesterday’s screening in Denver went. Be sure not to miss it.

Until tomorrow…

Cheers,

Joel Bowman
Rude Awakening

aussiejoel@the-rude-awakening.com