This week’s power punches came on three fronts. First, Citigroup,
the nation’s third-largest bank, said the fallout from the subprime
mortgage debacle is not yet over and could continue to plague the
financial industry. Former Federal Reserve Chairman Alan Greenspan
agreed with this assessment in an interview yesterday. Regular
readers of this column know that I've been warning about this for
weeks now.
Citigroup’s “unexpected” announcement apparently woke up
investors to the likelihood that operating losses for financial
companies won’t be limited to the third quarter of this year — a
quarter during which analysts at Standard & Poor’s estimate
corporate profits at banks and brokerage firms declined a whopping
14 percent, the biggest drop since 2001.
Meanwhile, Goldman Sachs told investors yesterday to
underweight the financials because it thinks banks may reduce their
2008 profit forecasts amid declining revenue from debt trading and
underwriting.
The second blow came on reports from the turbulent Middle East
that Turkish forces may pursue Kurdish militants in Iraq. This
announcement resulted in crude oil prices rising to their highest
level ever — closing at $87.61 on Tuesday.
The final power punch came from reports out of Europe that
central banks there are beginning to pressure the U.S. into taking
actions to curb the depreciating U.S. dollar. European officials are
concerned that the falling dollar (and their own, rising currencies)
limit the ability of European nations, including France, Germany and
others, to grow their exports. European exporters are being priced
out of foreign markets because of the dollar’s descent.
[Editor's Note: Cash
in on Dollar Slide. Make 25% to 50% in Six Months.]
The dollar’s rapid decline against other world currencies has
placed the U.S. Treasury in a position similar to that of the
Federal Reserve — it’s now between a rock and a hard place! If the
Treasury takes steps to curb the dollar’s decline, it will lose its
ability to persuade China to let the yuan trade more freely. On the
other hand, if the Treasury fails to act, the dollar will likely
continue to fall. Such an outcome would bring about further
inflation pressures, which in turn could cause the Fed to raise
short-term interest rates.
Yet, the blows weren’t limited to “power punches.”
Additional, more subtle pressures are afoot.
For example, an important announcement that was overlooked by
most investors and the talking heads on CNBC was a report from the
Congressional Budget Office (CBO) on the U.S. federal budget
deficit. Although the shortfall narrowed in the current fiscal year
ended September 30, the CBO expects the deficit to swell in fiscal
2009. The Bush administration expects it to widen even sooner as the
U.S. economy slows and due to the cost of funding the war in
Iraq.
A widening federal budget deficit would place both the Treasury
and the Fed in an even more difficult position, since the U.S.
government has been relying on borrowing from abroad to fund its
expenditures over the past several years.
If the deficit does expand, the U.S. government will likely need
to raise taxes or the Fed may need to raise interest rates to
encourage foreign investors to (indirectly) fund that spending. Even
if the Fed doesn’t raise interest rates, long-term rates will still
likely increase significantly because the Treasury will need to
issue more notes and bonds to fund an expanding deficit. (Remember,
when the supply of bonds rises, their prices fall and interest rates
therefore rise).
I've been warning you about numerous other negative economic
developments over the past month that point to a significant
economic slowdown in the U.S. and even an outright recession. Just
this month, we've seen weak manufacturing, retail sales, corporate
profits, employment, and housing reports — and the month is only
half over!
[Editor's Note: A
Bubble on the Verge of Bursting. Act Now.]
Just last Friday, three less-than-stellar economic reports were
released.
- The University of Michigan reported that its index of consumer
expectations regarding future economic conditions fell during
early October to the lowest level in more than a year as rising
energy prices and falling home values began to take a toll.
- The U.S. Department of Commerce announced that total retail
sales in the U.S. rose 0.6 percent in September versus the prior
month. That would be good news, but if you look beneath the
numbers, you'd see that higher-priced gasoline boosted those sales
greatly.
- In fact, the vast majority of the nation’s retail chain stores
actually saw declining sales during September on a same-store
basis. Only 30 percent of chain stores reported an increase of at
least two percent in their same-store sales during September
compared to a year ago. Comparatively, 58 percent of stores
reported same-store sales increases during August and 60 percent
in July. So, in reality, consumer spending on clothing, general
merchandise and other household items slowed significantly last
month.
- There was also disturbing news on the inflation front last
week, as prices of finished consumer goods — goods that were just
manufactured but not yet sold to consumers — rose at their fastest
pace in September since June 2006.
Various other statistics also show that inflationary pressures
are rising. For example, commodity prices rose 20 percent during
August, the latest period for which data is currently available, and
crude oil prices for November delivery hit an all-time high
yesterday. Food prices also continue to rise sharply.
[Editor's Note: Commodities
Are Still in a Bull Market. Get Our Top 6 Recos for the Coming
Year.]
So, as I’ve repeatedly warned over the past month, I strongly
urge you to not get sucked into believing the economy is in sound
shape and that stock prices will continue to rally. My research
shows just the opposite — that economic growth in the U.S. will slow
considerably over the coming months and that stock prices in general
will fall sharply.
The good news is that in spite of a slowing economy, you can
still make 50 percent to 100 percent profits in the coming year if
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Editor's Notes:
