G-20 Angst, Mark to Market, Geothermal Power, Volume Vigor and More!

Published: April 01, 2009

The 5 min. Forecast

by Addison Wiggin & Ian Mathias

G-20 kicks off with sizable protest… J.H. Kunstler on the “official hostility rising”
Global data disappoints… terrible export/production numbers from Asia, American job losses hit new highs
Wayne Burritt shares a glimmer of hope… and a chart to back it up
Dan Amoss explores a “widespread misconception” amid financial stocks
“The time for geothermal ought to be here,” says Byron King… so why isn’t it?

The G-20 meetings opened this morning in London to this:

As many as 35,000 protesters took to the streets in London. Above, you can see 4,000 in the square in front of the Bank of England. Nearby buildings are boarded up. Streets are closed. On the tube you can hear the pinheads chant, “Abolish money!”

Brilliant.

What a farce… too much costume and not enough bloodshed for a proper revolution. Despite some scuffles, arrests and a few broken windows at the Royal Bank of Scotland, thus far, it’s a benign gathering orchestrated mostly by perennial malcontents, ne’er-do-wells and professional slackers.

One Canadian reader tries to express his ire below.

You’d think with a large portion of the Western world’s retirement funds vaporized over the past 18 months -- there’d be a lot more blue hairs in the streets. The Dow and S&P 500 closed out the first quarter yesterday with an 11% loss. That’s the sixth quarter of losses in a row, the longest streak since 1970.

Alas, the April Fools’ joke is on those who chose to stay home today: "Mr. Obama heads to Europe,” writes the masterful Jim Kunstler in Whiskey & Gunpowder “where official hostility is rising against the Anglo-American method of pounding monetary sand down the ratholes of ‘nonperforming’ debt, bankrupt enterprise and bubble-levitated bonds.

“Our poised and charming prez may escape personal obloquy from the quaint old-world street folk, but most of the other G-20 policy players take a dim view of the shell-and-pea games being played by the custodians of the world’s reserve currency, including front-end-loader bank bailouts; the shuffling of worthless securities under TARPs and TALFs; the desperate efforts to prevent the sane repricing of real estate; the cannibalizing of treasuries by the Federal Reserve; the now-notorious hijacking of public ‘liquidity’ injections by third parties like Goldman Sachs; and, most generally, the perceived sacrifice of everybody else’s greater good for the sake of maintaining Lloyd Blankfein’s cappuccino machine."

(We have to say, that’s one heckuva single sentence, eh? Jim will be speaking lines like this publicly -- potentially laced with an expletive or two -- at our symposium in Vancouver. It’s a sight to behold. Please join us. Details here.)

And this… the American economy shed another 742,000 jobs in March, the payroll firm ADP announced this morning -- the biggest monthly job loss in its nine-year history. And over 94,000 worse than most quants were expecting. By ADP’s count, 4.4 million jobs have been lost since the recession began.

The Dow opened down another 1% on the news.

TrimTabs Investment Research estimates 700,000-750,000 jobs were lost last month, in line with ADP’s guess. The firm counts daily income tax-withholding reports flowing into the U.S. Treasury.

The Street is currently anticipating 656,000 lost jobs from the Bureau of Labor Statistics this Friday. Unemployment will likely rise to 8.5%. Any way you slice it… there are more layoffs, job losses and anxiety on the way.

We’ve seen a figurative tsunami of lousy numbers out of Asia overnight, too:

Japanese business confidence (the Tankan survey) plunged negative 58, the lowest since the survey began in 1974
Overseas sales in Japan crashed a record 49.4% in February from a year earlier
The same measure from China tumbled 25.7%
China’s Purchasing Managers Index -- essentially, its gauge of manufacturing activity -- stayed in contraction for the eighth month in a row
South Korean exports fell over 21% in February, its government announced today
Indian exports fell over 21% too, the biggest decline since at least 1995, when their government started keeping track.

But who cares, right? Stocks just finished their first positive month in since August.

On March 11, by order of the commander, we took down the Crash Flag. The rally had begun just two days before. After yesterday’s 1.2% gain, a healthy rebound from Monday’s sell-off, the Dow ended March with a 7.7% gain -- one of the best March performances since 1928, second only to March 2002.

For the month, the S&P 500 and Nasdaq fared even better.

“Check out trading volume over the past month,” suggests one of our options analysts, Wayne Burritt.

“Each of those bars indicates the volume -- or number of shares -- traded in S&P 500 member stocks that day. And the black line indicates the 50-day average of that trading volume.

“As you can see, average volume on the S&P 500 -- which had remained steady since January -- has popped significantly since the bull run started. Significant? No doubt about it. A market rising to the upside on increasing average volume means that investors are bidding up prices with more and more conviction. And they’re buying more shares at higher prices to prove it.

“That said, let’s not get ahead of ourselves. Stocks aren’t about to go straight up from here. There’s simply too much negative fundamental pressure out there for that to happen. And that pressure comes from the larger economy, as well as businesses and consumers.

“Plus, a slew of lousy first-quarter earnings reports are about to hit the Street -- and there will be quite a few, mark my words -- so that pressure is going to get bigger, not smaller. As a result, expect more days just like Monday, when the markets took a substantial 3% hit.”

Four different banks paid back their TARP loans yesterday, the first of the lot to do so. Signature Bank of New York; Old National Bancorp of Evansville, Ind.; Iberiabank down in Lafayette, La.; and California’s Bank of Marin paid back a collective $338 million, mostly by repurchasing the shares Uncle Sam bartered in exchange for the capital.

“It became apparent that we should return these funds to the Treasury,” said Signature’s CEO Joseph J. DePaolo. “The return of these funds allows us to continue to execute our business model, which includes the successful recruitment and retention of highly talented banking professionals throughout the metropolitan New York area.”

Nice. This is exactly what we were talking about when discussing executive bonuses back in January.

DePaolo went on to say TARP pressures and restrictions “adversely affected our business model.” In other words, the feds had forced him to borrow taxpayer cash and then hamstrung his ability to pay employees.

If small banks are starting to walk without a government crutch, should we expect those that are “too big to fail” to follow? Heh… not quite yet.

“It’s a widespread misconception,” writes Dan Amoss, “that banks have marked most of their assets to market. The mark to market rules generally apply only to securities, not whole loans. Whole loans are carried at original face value, less any impairment (i.e., provisions for loan losses) judged appropriate by management, with input from auditors.

“So the big banks have marked only a small fraction of their assets to market. In crushing all of the big bank stocks until the March 10 bottom, the market was discounting massive increases in loan loss provisions. The banks have already increased their provisions dramatically (in line with delinquencies and other indicators of impairment), but they still have a long way to go to offset the enormous potential losses on whole loans.”

Dan just put on another short play of a bank with dwindling assets and fat portfolio of collateralized mortgage obligations. His previous shorts were dead on, yielding 462% on Lehman before and after it went bust. Plus, 220% on PNC and another 238%% on Jo-Ann Stores. If you want to know the name of his next short, be sure to check Strategic Short Report this week. If you’re not currently a Reserve member or a solo subscriber to SSR, give it a look here.

The dollar continues to defy gravity as the global currency of choice today. It gave back a bit of Monday’s gains yesterday, but this morning, the dollar index is still holding up at 85.

Gold is keeping to a pretty tight range between $910-930 this week. This morning, an ounce can be had for $925.

Oil, though, is still getting sold. It seems as though optimism died for the gooey stuff on Monday, when the latest auto bailout news hit the wire and the buzz from the stock rally officially wore off. It’s down $5 a barrel since then, at $47 as we write.

“The time for geothermal ought to be here,” writes Byron King. “So why isn’t the geothermal business exploding?

“First, geothermal power is competing against a worldwide installed base of existing power systems and economics. When most people think of electricity, they don’t naturally conjure up images of steam wells turning turbines. Few schools anywhere teach future geologists how to “do geothermal.”

“Second, the pure-play geothermal companies are small firms subject to the same credit crunch as everything else that has gotten hosed in the past year. (Note, however, that the largest geothermal power player in the world is Chevron.) At the same time, all five of the geothermal companies in the Energy & Scarcity Investor portfolio are following their business plans.

“There is no bad news from any of them. Each of the geothermal companies is on target and budget. They are generally doing well, with sufficient cash to fund their current business plans. Yet the stock prices of the ESI players are trading flat or down. Consider buying a few more shares at low prices and waiting to profit in the future.”

Our discounted offer for Energy & Scarcity Investor ends tomorrow evening at midnight. Check it out here… as an excellent long-term way the alternative energy movement, which we expect will end in a bubble all its own at some point.

Last today, a sign of the times:

The two happiest days of your life: The day you buy it, and the day you abandon it

According to a report in The New York Times today, there’s been a slew of cases where boat owners have sanded the names off the hull, filed down registration numbers and ditched the things. Some just drive ’em into land and run, as you see above. Others anchor in the middle of nowhere and swim away. Some scuttle them and try to collect the insurance.

“We’ve never needed a law before,” a South Carolina councilman told The New York Times. South Carolina made “boat abandonment” illegal in January.

“As what you call a foreigner,” writes a reader, commenting on frustration with the U.S. from outside its borders… and apparently confusing us with someone else… “even though I live only half a mile from your border, I am more than unhappy about the situation created in the wonderful USA.

“Your country ruined the world’s economy by allowing your financial institutions to sell garbage to the rest of the world. Now you want to lead the world out of the mess you have created by getting your hands onto our money.

“Sorry, Americans, that’s not the way things will work out. We will not bail you out of the mess you have created for us, but we will do our best to make you pay for all the harm you have done to our economies. We outside the USA really could not care if your country goes down the drain. You never cared about our well-being either. If the Chinese will be the next world power, so be it, who cares -- yuan or dollar, what’s the difference?

“You want to impose democracy on other countries. May I suggest you start in your own country before telling other people what to do. The world is fed up with America. We hate to see you going the way the Roman Empire went, but it looks more and more that you deserve it.

“Just put it into your minds the world doesn't give a damn about the USA. All we want is getting on with our lives with or without you.”

The 5: Heh. We just want to get on with our lives without us too. We’ve updated Empire of Debt. You may want to get a copy when it hits the shelves in May.

Addison Wiggin
The 5 Min. Forecast

P.S. Two more days to get your mitts on Sonoma Grizzly Power for a song. Don’t miss it.

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G-20 Angst, Mark to Market, Geothermal Power, Volume Vigor and More!

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