Agora Financial’s Rude Awakening

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Dubai, UAE

• 117 banks hit the FDIC’s “Danger List,”
• One ugly financial chart (that’s a warning),
• Three reasons to back energy over financials and plenty more…   

Joel Bowman, reporting from Dubai in the Persian Gulf…

John Molony describes himself as “the kind of bloke who tells it like it is.”

Unfortunately for Molony, mayor of the remote north-west Queensland town of Mount Isa in Australia, people aren’t used to politicians “telling it like it is.” Spurred on by a wave of asphyxiating political correctness, we over-sensitive, mollycoddled masses have come to demand our news and opinions be fed to us with a rubber spoon.

Molony sparked controversy across the land Down Under when he had the gall to promote his tiny outback post as a destination for some of the more, er, “aesthetically challenged” members of the fairer sex.

“Often those who are beauty-disadvantaged are unhappy with their lot,” Molony said. “Some, in other places in Australia, need to proceed to Mount Isa where happiness awaits… I’m told men outnumber women here by five to one. If that’s the case, then perhaps it’s an opportunity for some lonely women.”

Predictably, Molony’s vicious and careless attack on women – and men…and, by God, all of humanity! – has prompted a deluge of complaints and protests. Some members of the community are even calling for Molony to resign from his position.

“I’m a bloke who respects women,” Molony told a local paper after every beauty-disadvantaged woman from Mount Isa to Uluru had taken a swipe at him. “I believe we should look after women.”

But Shirley Slann, a local domestic violence resource worker, isn’t buying any of it and has called for the mayor to publicly apologize.

“It’s a public attack on women and a form of verbal and emotional abuse,” Ms Slann said.

“It paints the women here as second rate and suggests the men will settle for anything. I think it’s quite disgusting. If he wants to come and visit our service, I’m more than happy to have a yarn to him about what he’s saying.”

Some may think Molony was simply pointing out the attractive opportunities one can find in an environment of short supply and high demand. Others might see him a backward chauvinist. That’s not our business here. We bring this quirky tale from our home country up today not to judge Mr. Molony or those who feel hurt and lost by his onslaught of “verbal and emotional abuse.” We
simply wish to learn from the unfortunate situation and to provide better coverage of the markets for you.

With that in mind, we offer the following warning:

If any reader, man or woman, attractive or not, is prone to finding himself or herself offended in any way by beauty-challenged financial charts, please do not read on any further. 

There. You’ve been warned… 

 

Our friends over at Casey Research alerted us to this rather ugly graphic when it was first published a couple of days back. Here’s what David Galland, managing director and editor of The Casey Report had to say about it.

“Q2 2008 – for the first time ever – the Dow Jones Industrial Average posted quarterly losses instead of earnings. The Dow’s price-to-earnings ratio is now listed as ‘Nil,’ leaving Wall Street without its favorite valuation metric for blue chip companies.

“Citigroup and JP Morgan were pummeled for their subprime investments,” continues David, “but the contagion of the credit crisis affected every balance sheet within The Dow. A couple of standouts amongst the wreckage were AT&T and Verizon, whose net incomes of $4B and $2B, respectively, were offset by huge losses in ‘Investing Activities.’ AT&T reported a loss of $11.3B, and Verizon lost $17.5B.

“These investment write-downs send huge amounts of capital to ‘money heaven,’ tempting some that have pitched a tent in the inflationist camp to wonder if we might be in for a major bout of deflation. But as Doug Casey so compellingly points out, today’s fractional reserve banking system forces the government to pursue an aggressive inflationary agenda. They must continue to push more and more money into the system to maintain the appearance of economic growth, and to cover up the losses of these blundering blue chips.”

[Ed. Note: "Inflation or Deflation" was the lead article in this month's issue of The Casey Report. To find out how you can nab a 3-month, 100% money back guarantee subscription to The Casey Report, chock-full of in-depth analysis and charts just like this, click here.]

To dig a little deeper into the issue Dan Amoss, editor of the Strategic Short Report, explains why things are bound to get a lot worse before they get any better for the beleaguered financial sector. Read on for details… 

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A Long View For Short Sellers
By Dan Amoss

In the eyes of most mainstream investors, July 15 was the bottom in financial stocks. I strongly disagree. I expect another ugly leg down in financial stocks before the end of 2008.

Recent bank earnings reports have all hinted that we’re still in the early stages of the credit loss cycle. What we’ve seen thus far has been the insolvency of those who levered up their personal or corporate balance sheets to buy houses and mortgage securities at the top of the bubble.

Home equity, credit card, and auto loan delinquencies have just started getting bad. The fallout from rising unemployment and shrinking discretionary income is just starting to impact corporate default rates. Edward Altman, a professor at NYU and founder of the “Altman Z-Score,” is one of the world’s
top authorities on the history of corporate defaults. He thinks this credit loss cycle is not close to being over. You can find the transcript of an excellent Bloomberg radio interview with Altman at this link.

We have yet to see the impact of a real recession on default rates. In the Aug. 1 issue of The Gloom, Boom & Doom Report, Dr. Marc Faber describes how most institutional investors fail to recognize the existence of big, generational changes in financial markets — even several years into the trend:

“What are the most overlooked and misunderstood big changes?

“In my opinion, the most misunderstood recent big change, in terms of its economic consequences, is the bursting of the credit bubble in 2007. It is as important a milestone in economic history as was 1929, when the markets began to fall apart, and as was 1981-1982, when bonds and equities entered a secular bull phase that would last for about 20 years. In 2007, the old order ended — the old order under which, in the United States, credit growth continuously outpaced GDP growth and, therefore, drove total credit market debt as a percentage of GDP from 130% in 1980 to around 350% at present (unfunded liabilities excluded). And while I am not suggesting that this excessive debt growth was the only factor driving the financial markets higher, it was certainly the key factor and led, from 1981 onward, to unprecedented asset inflation across a broad range of the investment spectrum.”

For us here at the Strategic Short Report, it makes sense to hold onto, or add to, long-dated puts on financial stocks.

A Macro Perspective on Recent Market Movements

The past few weeks have been tough, it is true. This market environment has been challenging for short sellers. The “hot money” herd, whether it’s day traders or computer-driven hedge funds, is in the process of unwinding speculative trades that were built upon the assumption of a strong euro/U.S. dollar exchange rate.

Here’s the current popular sentiment: Now that the “euro bull” case is unraveling, traders are dumping commodities. Since commodities are falling, many are starting to believe the Federal Reserve won’t have to tighten monetary policy to “fight” inflation. Therefore, you should buy financials and short energy, gold, and commodity stocks.

This is nonsense. The commodities down/financials up trade is not likely to go much further in terms of price. So let’s stick with lasting trends — the trends that are supported by sound fundamental research, rather than hope.

Here are three reasons why the managers running tens of trillions in financial assets will, over the next few years, move into investments related to energy and infrastructure, and away from investments related to debt-financed discretionary consumption:

First, the Fed will keep “unconventional” monetary policy in place to keep the megabanks on life support. Once the Fed’s balance sheet runs out of room to absorb more toxic assets, it will be forced to expand its assets and liabilities, which is inflationary. Rather than sit and watch as bad loans get written off and dozens of financial institutions fail, governments and central banks are “doing something” about it. The government has no resources beyond its power to tax and inflate, so that is its only real option if it wants to “do something” about the crisis. These actions will have far-reaching consequences, which include heavily diluting shareholders of financial institutions. What about those toxic securities currently on the Fed’s balance sheet? They will eventually return from whence they came, and this will eventually inflict more write-downs on bank shareholders.

Second, growing global competition for scarce commodities will put a floor under prices, especially when measured in Western currencies. As Asian and Middle Eastern currencies rise versus Western currencies, which they will, they will attract more of the world’s commodities at lower prices. Just
because Western consumers are slowing in their already high per capita consumption, doesn’t mean that a) the rest of the world won’t stop increasing its already low per capita consumption, or b) adequate long-term commodity supply will magically appear. Sure, there are corrections along the way. But we must not confuse corrections with the end of bull markets.

And third, Western consumer retrenchment and deleveraging probably lead to a return of Keynesian government policies: a more progressive tax code, deficit spending, and more onerous regulations. An excessively progressive tax code punishes capital investment and promotes consumption overproduction, which boosts the CPI; see the late 1970s for a parallel. Such an environment would not benefit the U.S.’ reputation as a “safe haven” for the world’s capital.

This type of investment environment will be challenging, but these three long-term trends should yield many attractive short sale opportunities.

[Joel's Note: This week we learnt that the Federal Deposit Insurance Corp’s (FDIC) “danger list” of banks in serious trouble grew 30% in the second quarter. It’s now eyeing some 117 separate institutions at risk of failure. Historically, according to the FDIC, around 13% of the banks on the list kick the bucket. As we write to you this morning, that’s 15 more banks staring down the gun barrel…on top of the nine already in the ground. 

Dan already offered his Strategic Short Report readers an opportunity to rake in 342% with a savvy play on Lehman Brothers a couple of months back. To learn more about Dan’s strategy – and for the next four financials he’s got on the chopping block - check out his latest report right here. 

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[Rude Endnote: Oh go on…you know you want to. Hate mail goes to the address below.

Love,

Joel Bowman
Rude Awakening

aussiejoel@the-rude-awakening.com