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And the bad news show continues..

July 14th, 2008 · No Comments

Some stabilization in the markets (for now, it’s stupid to write these things as the next half hour or so things might already change quite a bit). However, on the fundamental front, bad news keeps pouring in..

Who thought that Europe’s economies were in better shape then the US? Bloomberg noticed that industrial output drops the most since 1992. In fact, Euroland might already be in a recession (beating the US to it!):

The euro-area economy probably contracted in the second quarter for the first time since the single currency was set up almost a decade ago, according to economists at Citigroup Inc., JPMorgan Chase & Co. and Barclays Capital. Exports from Germany and France fell in May, while Europe’s manufacturing and services industries contracted in June, according to the latest purchasing-managers indexes.

“It is crystal clear that the manufacturing sector is struggling,” said Martin van Vliet, an economist at ING Group in Amsterdam. “With inventories of finished goods at elevated levels, manufacturing activity seems set to lose further momentum.”

Is it going to get better anytime soon? Not really…

“All the reliable leading indicators for industrial output, like the PMIs, for example, point to continued weakness,” said Kenneth Wattret, an economist at BNP Paribas in London.

And high levels of inventories don’t bode well either, one of the main transmission mechanisms for European industry is the falling dollar. Only a couple of years ago, Airbus looked like it was on a roll and it started to overtake Boeing. Then, they shot themselves in the foot (long delays for their superjumbo, things like that) and we can only imagine what they will be thinking now, with the currency markets now heavily favouring their major rivals.

Oh well.. And then there is Freddie and Fannie, those two big American mortgage giants. They were supposed not to have the most risky mortgage product on their books but even so, the housing market is so bad that even they are twisting and turning in the wind.

Paul Krugman’s observation that no major financial crisis goes without bailing-out the banking system does seem right on the mark once again. However, not everybody is happy with this, to say the least. Legendary investor Jim Rogers had this to say:

The U.S. Treasury Department’s plan to shore up Fannie Mae and Freddie Mac is an “unmitigated disaster” and the largest U.S. mortgage lenders are “basically insolvent,” according to investor Jim Rogers.Taxpayers will be saddled with debt if Congress approves U.S. Treasury Secretary Henry Paulson‘s request for the authority to buy unlimited stakes in and lend to Fannie Mae and Freddie Mac, Rogers said in a Bloomberg Television interview. Rogers is betting that Fannie Mae shares will keep tumbling.

Of course, IndyMac, another big mortgage bank, has already gone and the relief rally in the Freddies might be short-lived. The bail-out will have wider economic consequences, according to Roger:

“I don’t know where these guys get the audacity to take our money, taxpayer money, and buy stock in Fannie Mae,” Rogers, 65, said in an interview from Singapore. “So we’re going to bail out everybody else in the world. And it ruins the Federal Reserve’s balance sheet and it makes the dollar more vulnerable and it increases inflation.”

It’s an awkward choice for the Fed once again, but although we sympathize with Rogers, we disagree with him, the Freddies are too big to fail, that could really trigger some sort of melt-down in the US.

Luckily, every downside has it’s upside, as Rogers also has a good idea where to put your money, in agricultural commodities.

Consumer confidence has cratered, although somehow, the risks of spill-over to actual spending are diminished, according to Janet Yellen, the San Francisco Federal Reserve Bank President. One reason seem the tax rebate, and Fed officials are apparently monitoring the number of Google hits on ‘tax rebate’ to assess it’s impact. Interesting.

In the mean-time, shares have already gone south. That half hour we talked about above apparently kicked in.

Tags: The Markets