Wednesday, December 31, 2008

GOOD, BAD AND JUST UGLY

From inflation to deflation, or de-coupling to contagion, it was a year of unprecedented swings, not only in global markets but also in conventional wisdom.

Oil CLc1 started the year setting a series of records that culminated with prices hitting a peak at little under $150 in July.

It heads to the end of year below $39 a barrel, as investors have adjusted to the new economic order.

Prices will rise in 2009, but not by much. Analysts are forecasting an average of $49 a barrel for U.S. crude in the first quarter, and an average of $58.48 for the year.

In between, bursts of volatility in oil prices are expected as shown by the violence between Israel and Islamic group Hamas that sent oil prices jumping as much as 12 percent on Monday.

"Basically, the situation globally is much worse than expected. It's all very pessimistic numbers," said Tetsu Emori, a fund manager at Astmax Co Ltd in Japan.

Meanwhile, the U.S. dollar ends on a weakening tone, with the safe-haven bid that only a few months ago sent the greenback rallying all but forgotten now that the Federal Reserve intends to keep U.S. interest rates at near zero.

Japan's yen surged about 19 percent this year to post its biggest annual percentage gain since 1987, denting the prospect of exporters in the world's second-largest economy.

British sterling is pinned at near record lows amid a truly dire outlook for the U.K. economy.

The euro edged up to $1.4115 in Asian trade, from $1.4072 late on New York on Tuesday, while the dollar was down almost 1 percent .DXY at 80.627 against a basket of currencies.

The euro was holding firm at 97.75 pence against the sterling, having touched a high of 98.05 on Tuesday, near parity for the first time since its launch in 1999.

Assets seen as safer during times of trouble outperformed. Gold was trading at $865.35 an ounce, down $6.75 from New York's notional close on Tuesday, but it still ends the year as one of few commodities to end the year firmer despite its traditional role as an inflation hedge.

Among the best bets this year were government bonds. U.S. Treasury benchmark yields have dropped this month to their lowest since 1950, amid an intense bid for safety, rock bottom rates and expected Fed buybacks of debt, including of mortgage-backed securities.

Benchmark 10-year notes dipped 4/32 in price to yield 2.067 percent on Wednesday, near the five-decade low of 2.04 percent struck earlier in the month. For the year, yields have tumbled 1.96 percentage points for their biggest yearly drop since 1995 and the second biggest in the last 20 years. (Additional reporting by Simone Giuliani in SYDNEY and Parvathy Ullatil in HONG KONG, Editing by Lincoln Feast)

More economic pain seen in 2009, govt's to pump up aid

* 2008 one of the worst on record, investors eye more government aid

* More layoffs, bad loans, bankruptcies seen in near term

* Business activity continues to shrink

* Paulson says U.S. lacked tools to tackle financial crisis (For stories on the financial crisis, click on [nCRISIS]

By Kim Coghill

SINGAPORE, Dec 31 (Reuters) - Investors said good riddance on Wednesday to one of the worst years on record and prayed that massive government rescue plans will pull the global economy out of its fierce tailspin later in the new year.

But more pain is expected in the near-term as bleak economic reports roll in, signalling more bankruptcies, bad debts and layoffs through at least early 2009, and more sleepless nights for everyone from central bankers to consumers struggling to pay off mortgages and credit card bills.

The biggest financial crisis in 80 years, sparked by the meltdown of the risky U.S. subprime mortgage market, made this year one of the worst ever for investors as recession stalked the global economy.

"It has been a shocking year, hardly anything was spared in the market carnage," said Michael Heffernan, senior client adviser and strategist at Austock Group in Australia.

European shares looked set to end the year with a 45 percent loss, their biggest ever annual drop and roughly in line with gut-churning declines on other major global markets.

The slump wiped out nearly $14 trillion in market value, according to the benchmark MSCI world index of larger companies.

For all markets, the damage was probably much worse. The World Federation of Exchanges, which tracks stock markets in 53 developed and emerging economies, said some $30 trillion in market value evaporated through end November.

The crisis also radically changed the landscape of global finance, bringing down big U.S. investment banks Bear Stearns and Lehman Brothers, saddling many other international banks with huge losses and crippling the credit system that keeps the world economy humming.

The U.S. S&P 500 benchmark has lost about 40 percent with just one trading day left in 2008. Its biggest yearly drop was in 1931 during the Great Depression, when it fell 47.1 percent.

No sector has been spared from global banks to autos to resources, and even corner stores.

Victims of the crisis are still piling up, with announcements almost daily of fresh company losses, more layoffs, and slumping prices for assets from cars to homes.

Gold was one of the few commodities to end the year higher, gaining about 4 percent, as panicky investors fled stock markets for assets which are seen as safer during times of trouble.

MORE BAD NEWS

Tuesday brought more dismal economic news in the United States, with single-family home prices down 18 percent in October from a year earlier and consumer confidence plunging to a record low due to severe job cuts. [ID:nN30339924]

"We are not going to be seeing anything fundamentally positive from the U.S. for the time being," said Michael Woolfolk, senior currency strategist at Bank of New York Mellon.

But with central banks cutting interest rates to spur growth, declining oil prices and governments pumping money into the system, Heffernan said there were some positive signs for 2009.

"The blood has been drained and we are now getting a transfusion."

World governments have pumped more than $1 trillion into their economies to keep business afloat and save jobs, and more aid is expected in 2009 as leaders battle to stave off an even deeper and possibly longer recession.

Global credit markets are showing some signs of improvement, but banks remain reluctant to lend to businesses and consumers, fearing a rash of bad loans as economies worsen.

Government stimulus plans, corporate bailouts and rate cuts also take time to be felt, and their full benefits are still being hotly debated by analysts and economists. Global growth, if any, could be very weak in 2009 as a whole even if consumers are coaxed to start spending again, which is key to recovery.

The Indonesian government may announce more fiscal plans on Wednesday to help Southeast Asia's biggest economy withstand the global economic slump.

Indonesia's economy is still expanding, but growth may drop below the 6 percent pace analysts say the country needs to prevent unemployment from rising among its 226 million people.

Mounting job losses are raising fears of social unrest in some countries, and piling pressure on governments to act quickly, even if it means huge deficits and debts that will have to be paid off somehow in the future.

Investors are now looking to January, which will bring a new U.S. administration when Barack Obama is sworn in as president on Jan. 20. He is expected to unveil a government spending programme which sources say could range from $675 billion to $775 billion over two years.

The new year will also mark attempts by global policymakers to overhaul outdated regulatory systems to head off future crises and give them more power to oversee increasingly complex financial products such as derivatives, which have complicated efforts to fix the latest financial mess. Outgoing U.S. Treasury Secretary Hank Paulson said the U.S. government had to battle the financial crisis without the tools needed to do the job effectively, the Financial Times newspaper reported on Wednesday.

In one of his last interviews before leaving office, Paulson said, "We've done all this without all of the authorities that a major nation like the U.S. needs."

He said even after Congress in October approved the $700 billion troubled asset relief program, Washington still lacked tools such as an adequate special bankruptcy regime for non-bank financial firms.

"We're dealing with something that is really historic and we haven't had a playbook," he said. (Reporting by Reuters bureaux worldwide; Editing by Tomasz Janowski)

FOREX-Dollar rises; euro poised for yearly fall

* Dollar rises; euro/dlr eyes first yearly drop since 2005

* Yen seen as standout FX winner in 2008

* Pound down 27 pct vs dlr, worst since gold standard ended

(Changes byline, adds comment, updates throughout)

By Naomi Tajitsu

LONDON, Dec 31 (Reuters) - The euro fell against the dollar on Wednesday and was poised to post its first annual fall versus the U.S. currency in three years as a historic financial crisis sparked a rush into the dollar this year.

Along with the yen, the dollar is seen ending 2008 higher against major currencies as the financial market meltdown and a global recession has triggered a wave of deleveraging and repatriation flows in both currencies amid extreme risk aversion.

Currency moves were limited as traders closed their books at the end of a year which saw failures and part-nationalisations of banks around the world and an escalation of the credit crunch triggered as the U.S. subprime mortgage market went belly up.

This triggered a massive slashing of global interest rates as central banks fought to shore up their economies -- the Federal Reserve and the Bank of Japan cut rates virtually to zero -- and analysts said that the gloomy economic scenario will continue to drive the currency market next year.

"The legacy of 2007-2008 is going to hang over into 2009. the question is whether we're going to see any traction on the economic backdrop and at least at this juncture that's difficult to see that occurring," said Jeremy Stretch, strategist at Rabobank in London.

The euro is en route to posting a 3.9 percent fall against the dollar this year -- its first annual drop since 2005 -- while the U.S. currency is seen gaining roughly 5.5 percent against a basket of currencies .DXY.

The yen inched up slightly, prodding the dollar down to 90.20 yen. Despite its rally against higher-yielding currencies like sterling and the Australian and New Zealand dollars, the U.S. dollar has tumbled roughly 19 percent against the yen since the start of the year.

This year's standout currency is the yen, which has soared as the financial crisis prompted a massive unwinding of carry trades -- borrowing in the low-yielding yen to invest in higher-yielding assets elsewhere.

Sterling stood out as the major currency loser in 2008. Its near 27 percent slide against the dollar this year would be the biggest since the gold standard was abandoned in 1971, while euro/sterling hovers around a record high and inches towards parity.

The pound has taken a beating as the Bank of England frantically slashed rates to 2.0 percent this year, their lowest since the 1950s, and investors see more room for rates to fall.

Analysts said that 2008 will remembered by currency market participants as a year of intense volatility as traders used foreign exchanges as a platform to put on risk-averse trades.

"People are shell shocked from the past year... It's been a roller coaster ride," said Stretch at Rabobank.

"Clearly it's been a year when forex has moved back up onto the radar screens of financial markets.

2009 OUTLOOK

While analysts agree that none of the world's major economies will be spared from recession next year, views are divided about how economic weakness will affect currencies.

Rabobank's Stretch said that the euro is likely to continue a slide against the dollar from past weeks on growing expectations that the U.S. economy may be among the first to recover from the downturn, while the fragility of the euro zone economy is likely to become more pronounced in 2009.

Still, other analysts say that ongoing U.S. economic woes and uncertainty about how the country will fund a massive fiscal stimulus programme when it is running a substantial current account deficit will sting the dollar in 2009.

"The trend of dollar weakness is unlikely to have yet seen the end," Bank of America G10 currency strategist David Powell said.

"Euro/dollar is set for additional gains on the continued easing of monetary policy in the U.S. via quantitative easing," he added.

He added that the relatively staid rate of monetary easing by the European Central Bank -- which has cut rates to 2.5 percent -- has benefitted the euro as it contrasts with the dramatic pace set by the Fed and the BoE.

(Additional reporting by Jessica Mortimer; Editing by Ron Askew)

Wednesday, December 24, 2008

Wall Street Digest Hotline Update

This is The Wall Street Digest Hotline Update for Tuesday, December 23, 2008, at 6:00 p.m. EST.

Existing home sales plunged in November. At the close, the Dow sank 100 points, closing at 8,420, while the Nasdaq lost 10 points, closing at 1,522. The S&P 500 fell 8 points, closing at 863. Oil closed $0.93 lower at $39.13 per barrel, and gold closed $9.10 lower at $838.10 per ounce.

The economic news is bad and it will get worse. The economic data is signaling a deep global recession

Existing home sales fell 8.6 percent in November. Home prices fell 13.2 percent year-over-year, the biggest decline on record. Analysts expect home prices to plunge further as foreclosures rise and unemployment continues to rise in the coming months and years. Economists expect unemployment to finally peak in 2013. The Fed, the U.S. Treasury, and Congress have done nothing to stop falling home prices, which is the principle cause of the deflationary credit collapse.

The Kress major market cycle bottomed on Monday, December 22. I expect a bear market rally to unfold between January and July 2009. This rally may or may not post new highs in 2009. This will be a temporary bear market rally, not a new bull market. I continue to believe all of the bubbles including commodities will burst by mid-2010. Nothing can stop the 2010-2012 bear market and recession because all of the engines of economic growth will turn negative by mid-2010.

The Wall Street Digest's office will be closed Thursday and Friday, December 25th and 26th, 2008 in observance of the Christmas Holiday.

The next Hotline Update will be on Tuesday, December 30, 2008, at 6:00 p.m. EST.

Thursday, December 4, 2008

Wall Street Digest Hotline Update

This is The Wall Street Digest Hotline Update for Tuesday, December 2, 2008, at 6:00 p.m. EST.

Traders were apparently betting that Congress will bail out the auto unions, excuse me, the big three auto-makers. Stock prices soared right to the closing bell. At the close, the Dow jumped 270 points, closing at 8,419, while the Nasdaq rose 51 points, closing at 1,450. The S&P 500 gained 32 points, closing at 849. Oil closed $2.32 lower at $47.13 per barrel, and gold closed $6.50 higher at $783.30 per ounce.

The economic news is bad, and will get worse. The economic data is signaling a deep global recession.

The U.S. manufacturing sector hit a 26-year low yesterday. Treasury yields also hit record lows. GM auto sales fell 31 percent, Ford sales fell 30 percent, Toyota fell 34 percent, and Chrysler sales were down 47 percent.

On the plus side, there is a major market cycle bottom that is due on about December 21st. I expect to see a bear market rally to unfold between January 2009 and July 2009. This rally may or may not rise to new highs in 2009. This will be a temporary bear market rally, not a new bull market. I continue to believe all of the bubbles including commodities will burst by mid 2010. Nothing can stop the 2010-2012 bear market and recession because all of the engines of economic growth turn negative by the middle of 2010.

(A) If you are out of the market stay out and wait for a confirmed bottom.

(B) If you are market neutral with both long and short positions stay that way.

(C) If you are long the market, consider offsetting short positions using ETFs.

(D) If you are short the market, consider offsetting long positions using ETFs.

Now is a good time to read "The Great Bust Ahead" by Daniel Arnold, and "Dollar Crisis" by Richard Duncan.

Stay close to our Hotline Updates.

The next Hotline Update will be on Friday, December 5, 2008, at 6:00 p.m. EST.

Friday, November 14, 2008

Wall Street Digest Hotline Update

This is an Interim Wall Street Digest Hotline Update for Wednesday, November 12, 2008, at 6:00 p.m. EST.

Profit warnings by Best Buy helped push stock prices lower today. At the close, the Dow plunged 411 points, closing at 8,283, while the Nasdaq fell 81 points, closing at 1,499. The S&P 500 lost 45 points, closing at 852. Oil closed $3.17 lower at $55.75 per barrel, and gold closed $14.50 lower at $718.30 per ounce.

The market is testing the October lows. The completion of an inverse head-and-shoulders pattern could produce the final bottom followed by a strong 2- to 6-month bear market rally back to Dow 11,000 to 12,000.

(A) If you are out of the market stay out and wait for the bottom.

(B) If you are short the market stay short for now.

(C) However, if you are long the stock market, consider purchasing off-setting short positions so you are market neutral. Use Proshares 200 percent short ETFs to offset your long positions.


ProShares Ultra Short 200% Short

Dow 30 DXD

S&P 500 SDS

Russell 2000 TWM

Nasdaq 100 QID

S&P 400 Mid-Cap Index MZZ


Make no further portfolio investments.

Now is a good time to read "The Great Bust Ahead" by Daniel Arnold, and "Dollar Crisis" by Richard Duncan.

Stay close to our Hotline Updates.

The next Hotline Update will be on Friday, November 14, 2008, at 6:00 p.m. EST.

Thursday, November 6, 2008

Wall Street Digest Hotline Update

This is an Interim Wall Street Digest Hotline Update for Wednesday, November 5, 2008, at 6:00 p.m. EST.

Uncertainty over the new administration pushed stock prices lower today. At the close, the Dow plunged 486 points, closing at 9,139, while the Nasdaq lost 98 points, closing at 1,681. The S&P 500 closed almost 53 points lower, closing at 952. Oil closed $5.23 lower at $65.29 per barrel, and gold closed $14.90 lower at $742.40 per ounce.

The market's gains since the Wednesday, October 27, 2008 bottom last week have been largely from short-covering. However, aggressive buying on Tuesday triggered a technical buy signal.

The pull-back today produced a better buying opportunity for investors.

Here are the best performing ProShares ETFs. All eight of these ETFs are leveraged 200 percent:


ProShares Basic Materials UYM

ProShares Russell 2000 Index UWM

ProShares Financial Index UYG

ProShares Telecom Index LTL

ProShares S&P 500 Index SSO

ProShares Mid-cap 400 Index MVV

ProShares Nasdaq 100 Index QLD

ProShares Dow 30 Index DDM



This is a bear market rally that could move up to Dow 11,000, possibly 12,000 before the Recession and Bear Market of 2010-2014.

Now is a good time to read "The Great Bust Ahead" by Daniel Arnold, and "Dollar Crisis" by Richard Duncan.

Stay close to our Hotline Updates.

The next Hotline Update will be on Friday, November 7, 2008, at 6:00 p.m. EST.

Sunday, October 5, 2008

Wall Street Digest Hotline Update

This The Wall Street Digest Hotline Update for Friday, October 3, 2008, at 6:00 p.m. EST.

The House passed the bail-out bill by a wide margin. A 300-point gain in the Dow Jones Industrial Average evaporated during the televised House vote. At the closing bell, the Dow fell 157 points, closing at 10,325, while the Nasdaq lost 29 points, closing at 1,947. The S&P 500 closed 15 points lower at 1,099. Oil closed $0.09 lower at $93.88 per barrel, and gold closed $11.10 lower at $833.20 an ounce.

Traders on the floor of the stock exchanges are saying, "the magnitude of the problem is greater than the bail-out bill." Fed Chairman Bernanke is flooding the banking system with money-an astounding $120 billion last week. If the banks don't start lending, Bernanke has the option of lifting banking licenses, which are issued by the Fed.

Credit is still tight and very expensive. The banking and housing stocks tumbled after the bail-out bill passed. The $700 billion bailout plus one trillion dollars to be created by the Fed will liquefy the banking system and inflate the last bubble; commodities.

The economy is sliding into a ditch. 2009 will be a very difficult year. An economic disaster is waiting for the next President.

The real value of the $700 billion TARA bail-out is to temporarily stop a financial collapse, which will give you time to prepare for the great Bear Market crash between 2010 and 2015.

Now is a good time to read "The Great Bust Ahead" by Daniel Arnold.

You should stay 100 PERCENT CASH. I do not have a buy signal for the stock market.

Stay close to our Hotline Updates.

The next Hotline Update will be on Tuesday, October 7, 2008, at 6:00 p.m. EST.

Wednesday, October 1, 2008

Wall Street Digest Hotline Update

This is The Wall Street Digest Hotline Update for Tuesday, September 30, 2008, at 6:00 p.m. EST.

Efforts to put the TARA bill back on the table pushed stock prices higher today. At the closing bell, the Dow soared 485 points, closing at 10,850, while the Nasdaq jumped 98 points, closing at 2,082. The S&P 500 closed 58 points higher at 1,164. Oil closed $4.27 higher at $100.64 per barrel, and gold closed $13.60 lower at $880.80 an ounce.

The powerful six-year down cycle bottomed today. But let's wait and see what the SEC does with the short-selling ban.

Trading on Monday was an exceptional 75-to-1, downside volume to upside volume indicating a sold-out market.

The Vix Volatility Index hit a multi-year high at 46.72, another indicator of a likely major market bottom. If Congress passes a convincing Main Street bail-out bill fairly soon, we could see a multi-month rally perhaps into December.

However, the economy is sliding into a ditch. 2009 will be a very difficult year. An economic disaster is waiting for the next President.

The real value of the $700 billion TARA bail-out is to temporarily stop a financial collapse, which will give you time to prepare for the great Bear Market economic crash between 2010 and 2015.

Now is a good time to read "The Great Bust Ahead" by Daniel Arnold.

You should stay 100 PERCENT CASH.

Stay close to our Hotline Updates.

The next Hotline Update will be on Friday, October 3, 2008, at 6:00 p.m. EST.

Sunday, September 28, 2008

China's Wen says to cooperate to calm markets

09.28.08, 1:51 PM ET


United States - (Adds quotes, details, background)
WASHINGTON (Reuters) - Chinese Premier Wen Jiabao said Beijing was worried about the impact on its investments of U.S. financial market turmoil but now was the time to cooperate to calm markets.

"U.S. finance is closely connected with the Chinese finance," Wen said in an interview aired on Sunday on CNN.

"If anything goes wrong in the U.S. financial sector then we are anxious about the safety and security of Chinese capital," he said, but now was time to "join hands" to deal with the crisis.

"Now, cooperation is everything," Wen said in an interview that was taped last week.

He said Beijing still considered the U.S. economy to be "solidly based, particularly in the high tech industries and basic industries" but wanted to see it become more stable.

"The Chinese government hopes very much that the U.S. side will be able to stabilize its ... economy and finances as quickly as possible," Wen said. "Of course we are concerned about the safety and security of Chinese money here."

The United States is reliant on borrowing from China and other countries to finance its day-to-day operations. China at the end of June held $1.8088 trillion in foreign exchange reserves.

"We believe the United States is a credible country," Wen said. "Particularly at such difficult times China has reached out to the United States and we believe that such a helping hand will help stabilize the entire global economy and finances and prevent major chaos from occurring." (Reporting by Glenn Somerville; Editing by Neil Stempleman)

Copyright 2008 Reuters,

Lawmakers Reach Accord on Huge Financial Rescue

By Lori Montgomery and Paul Kane
Washington Post Staff Writers
Sunday, September 28, 2008; 2:56 AM

Congressional leaders and the Bush administration this morning said they had struck an accord to insert the government deeply into the nation's financial markets, agreeing to spend up to $700 billion to relieve Wall Street of troubled assets backed by faltering home mortgages.

House and Senate negotiators from both parties emerged with Treasury Secretary Henry M. Paulson Jr. at 12:30 a.m. from a marathon session in the Capitol to announce that they had reached a tentative agreement on a proposal to give Paulson broad authority to organize one of the biggest government interventions in the private sector since the Great Depression.

Full details of the plan were not immediately available. Lawmakers said their staffs would be working through the night to assemble the package and post it on the Internet.

"We've made great progress, but we have to commit it to paper before we can formally agree," said House Speaker Nancy Pelosi (D-Calif.), who has pledged to make the plan available to the public for at least 24 hours before the House votes on it. A vote could come as early as tomorrow in the House, with the Senate expected to follow soon after.

"We've been working on this a long time. We've still got more to do to finalize it, but I think we're there," Paulson said. "So far, so good."

Rep. Roy Blunt (R-Ohio), who represented House Republicans, the group that had raised the most serious objections to the plan, said he was pleased with the progress made but that he had to take the proposal back to his caucus before committing his support for it. "I look forward to what we're going to see on paper and presenting these ideas to my colleagues and getting their reaction," Blunt said.

A senior administration official, who requested anonymity to speak freely about the plan, said both sides had made significant concessions to achieve compromise. The Bush administration has agreed to accept a number of Democratic demands, including:

· The money would be dispersed in segments, with Paulson receiving $250 billion immediately, $100 billion upon White House certification of its necessity and the final $350 billion only after Congress has been given 15 days to object.

· Firms participating in the bailout would be required to grant the government warrants to obtain nonvoting shares of stock, so taxpayers can benefit if the companies return to profitability.

· Firms taking advantage of the bailout would be required to limit compensation for senior executives, with especially severe limits on "golden parachutes" at failing firms. The compensation limits will be enacted primarily, but not solely, through the tax code by reducing tax deductions for firms that pay executives more than $400,000 a year.

The administration also agreed to Democratic demands that the financial services industry should help pay for the program. Under the agreement, the president would be required to propose a fee on the industry if the government has not recovered its money through sales of the assets within five years.

Democrats also made a number of concessions, abandoning demands that bankruptcy judges be empowered to modify home mortgages on primary residences for people in foreclosure. They also agreed not to dedicate a portion of any profits from the bailout program to an affordable housing fund that Republicans claimed would primarily assist social service organizations that support the Democratic Party, the official said.

Meanwhile, House Republicans won a major victory, persuading negotiators to include a provision that would require the Treasury Department to create a federal insurance program that would guarantee banks and other firms against loss from any troubled asset, the official said.

The plan to rescue the U.S. financial markets was first advanced by the Bush administration in a late-night meeting with lawmakers just 10 days ago. Under the proposal, Paulson would be authorized to purchase mortgage-backed assets from struggling firms in hopes of easing a credit crunch that has pushed global markets to the brink of collapse.

With home prices plummeting, many of those assets are now almost worthless, and investors have lost confidence in many of the firms that hold them. That has undermined some of the biggest names on Wall Street and caused banks to stop lending money, sparking a credit crisis that threatens to deliver a devastating blow to businesses, consumers and the broader economy.

Administration officials have stressed that the ultimate cost of the bailout would be much less than $700 billion because the government would eventually sell the assets it purchased and recover most, if not all, of its investment.

Yesterday's talks, conducted mainly in Pelosi's suite of offices on the second floor of the Capitol, were focused heavily on how to cover the cost of the program so taxpayers don't get stuck with the bill.

"We believe that the taxpayer should not be left holding the bag at the end of the day, and we've proposed a way to address that," said Rep. Chris Van Hollen (D-Md.), a member of Pelosi's leadership team.

Democrats said there were no outstanding issues remaining, but that negotiators need to see the words on paper before they can sign off on the plan. "It's really a question of seeing what we believe we've agreed to," said Sen. Christopher J. Dodd (D-Conn.), chairman of the Senate Banking Committee.

Even strong opponents of the plan said they expected it to pass.

Sen. Richard C. Shelby (R-Ala.), the senior Republican on the Senate Banking Committee, who has refused to participate in the talks, said a "critical mass" was forming behind the measure because of fears that Congress's failure to act would cripple financial markets and devastate the economy.

Yesterday's negotiations, which began shortly after 3 p.m., were at times tense and confusing, according to participants. At one point, according to Sen. Kent Conrad (D-N.D.), one senator sought advice from investor Warren E. Buffett, one of the world's richest men and a director of The Washington Post Co.

From 3 p.m. to 5:30 p.m., Conrad and other lawmakers met with Paulson around a massive table in Pelosi's conference room under an ornate portrait of Abraham Lincoln. Among lawmakers, Democrats outnumbered Republicans nine to two, an imbalance that so irritated Paulson that he called and complained to Senate Majority Leader Harry M. Reid (D-Nev.), according to three GOP sources familiar with the call.

Reid told Paulson he would not pull any of his colleagues out of the meeting. A Reid spokesman, Jim Manley, said: "If the secretary doesn't like it, that's just too bad, because he is going to need the help of each and every one of them to sell the president's plan to the Democratic caucus and the American people."

After a break for dinner, the sides scattered into at least three separate groupings -- Paulson huddled in House Minority Leader John A. Boehner's office with other GOP leaders, Democrats in Pelosi's conference room and Pelosi in a separate suite talking with other Democrats.

Rep. Rahm Emanuel (D-Ill.) and Pelosi's chief of staff spent a couple of hours in shuttle diplomacy, frantically walking from room to room carrying sheets of paper. Conrad, the chairman of the Senate Budget Committee, said the negotiators were "shopping language" of the bill's draft versions. He and Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, also spent time in Boehner's office with Paulson.

By 11 p.m., the three groups had once again converged in Pelosi's office to strike a final deal.

Yesterday's focus on limiting taxpayer exposure may help rally support in Congress, where lawmakers have been reluctant to back the hugely expensive and unpopular bailout measure less than six weeks from the November elections. But it could unnerve Wall Street, where investors are seeking the largest possible program with the fewest strings attached. They also hope lawmakers approve it before tomorrow's opening bell.

In his public testimony and private remarks, Paulson has repeatedly emphasized the need to spend $700 billion to soothe nervous markets. At that price, the government's upfront investment in the rescue package would be more expensive than the current cost of the Iraq war, which stands at about $650 billion, according to the Congressional Research Service.

But the White House and politicians on Capitol Hill have said the government could earn back much of its money, or even turn a profit.

"Many of these assets still have significant underlying value, because the vast majority of people will eventually pay off their mortgages," President Bush said yesterday in his weekly radio address. "In other words, many of the assets the government would buy are likely to go up in price over time. This means that the government will be able to recoup much, if not all, of the original expenditure."

Bush attempted to address criticisms from the right and left that the plan would bail out irresponsible financiers while doing nothing for regular Americans. Echoing frequent comments by him and his aides, Bush said allowing Wall Street to collapse further would pose greater dangers to the economy, perhaps triggering a "deep and painful recession."

"The rescue effort we're negotiating is not aimed at Wall Street -- it is aimed at your street," Bush said. "And there is now widespread agreement on the major principles. We must free up the flow of credit to consumers and businesses by reducing the risk posed by troubled assets."

Democratic leaders have emphasized to rank-and-file members that Paulson has told them that he could only spend about $50 billion a month on the securities purchase program. Of the $700 billion figure, House Majority Leader Steny Hoyer (D-Md.) said: "Nobody believes that's going to be the final cost."

Staff writer Dan Eggen contributed to this report.

China c.bank says to slow yuan rise - economist

TIANJIN, China, Sept 28 (Reuters) - The People's Bank of China has stated recently that it will slow appreciation of the yuan, a prominent economist who met with officials of the central bank said on Sunday.

The comments by David Hale, chairman of Hale Advisors, support the perception of many observers that the central bank has shifted to a policy of slower yuan strengthening, as the currency stalled against the dollar in the third quarter.

"I had lunch with the People's Bank of China on Friday, and they told me that they're going to slow down the appreciation of the currency here," Hale told a meeting of the World Economic Forum in the northern Chinese port city of Tianjin.

"If they do that, they have to intervene, so China will be providing for America next year another $200-300 billion of demand for U.S. Treasury bills," he said.

In a discussion on the future role of the dollar in the global economy, Hale cited China's policy as one reason to believe that the United States would continue to be able to cover its budget deficit, even if it carries out the massive financial bailout plan under discussion in the U.S. Congress.

The yuan closed at 6.8485 against the dollar on Friday, the last trading day of the third quarter before a week-long national holiday, little changed from the level at the end of June.

That came after the yuan appreciated about 6.5 percent in the first six months of the year. Many economists have now changed their forecasts for the yuan to account for a slower pace in the coming months.

Hale added that he thought China's increasing role in the global economy would mean that the yuan, or renminbi (RMB), would one day become a global reserve currency, though that would take time on account of China's capital restrictions.

"Given China's evolving role, there's no doubt the RMB will assume a global role in time," he said. "We're talking 20 years from now, not in the next few years," he said. (Reporting by Jason Subler; Editing by Jacqueline Wong)

Wall Street Digest Hotline Update

This is The Wall Street Digest Hotline Update for Friday, September 26, 2008, at 6:00 p.m. EST.

The market did not tank despite no TARP deal today. At the closing bell, the Dow gained 121 points, closing at 11,143, while the Nasdaq lost 3 points, closing at 2,183. The S&P 500 closed 4 points higher at 1,213. Oil closed $1.13 lower at $106.89 per barrel, and gold closed $6.50 higher at $888.50 an ounce.

Our politicians will work over the weekend to hopefully pass the TARP bill before the opening bell at 9:30 a.m. on Monday. Even so, the democrats have the votes to pass their bill today. They won't however, because taxpayers overwhelmingly do not want the $700 billion TARP bill to pass. How big is $700 billion relative to our debts? The Federal Reserve Flow of Funds data for the second quarter of 2008 reveals $148 trillion in debt.

A second comparison: Home mortgages totaled $10.6 trillion at the end of the second quarter. One-in-ten mortgage loans are in default or delinquent.

A third comparison: The Bank for International Settlements (BIS) revealed $596 trillion in debts which included $58 trillion in credit default swaps that are beginning to meltdown.

Final comparison: Citigroup has $1.1 trillion of assets off its books. Some of this bad debt dates back to the Enron Collapse, when Enron could not pay off its loan from Citigroup.

$700 billion is probably just a down payment to hold the financial system together. For how long, no one knows.

The real value of the $700 billion TARP program is to temporarily stop a financial collapse, which will give you and the Wall Street smart money time to prepare for the great economic crash between 2010 and 2015.

Now is a good tome to read "The Great Bust Ahead", by Daniel Arnold.

You should stay 100 PERCENT CASH.

Don't be surprised if the market moves back down to test the recent lows. I expect a profitable rally ahead if Congress passes a convincing bill that restores investor confidence in the U.S. banking system.

Stay close to our Hotline Updates.


The next Hotline Update will be on Tuesday, September 30, 2008, at 6:00 p.m. EST.

Monday, September 22, 2008

Bailout's price tag seen pressuring dollar

Broad gains for other major currencies as investors weigh U.S. plan
By William L. Watts & Deborah Levine, MarketWatch
Last update: 10:02 a.m. EDT Sept. 22, 2008
Comments: 16
NEW YORK (MarketWatch) -- Sticker shock weighed on the dollar Monday as financial markets wrestled with the implications of the U.S. government potentially taking on $700 billion in debt to finance a massive bailout and stabilization of the financial sector and money markets.
Washington's ambitious strategy to clean up the troubled U.S. financial system's debt load "have been largely dollar-negative," said James Hughes, an analyst at CMC Markets.
The dollar index (DXY:
US Dollar Index Future - Spot Price
News, chart, profile, more
Last: 76.91-0.55-0.70%
10:23am 09/22/2008
Delayed quote data
Add to portfolio
Analyst
Create alert
Insider
Discuss
Financials
Sponsored by:
DXY 76.91, -0.55, -0.7%) , a measure of the greenback against a trade-weighted basket of currencies, fell to 76.982, down from 77.663 late Friday in North American trading.
"Many traders seemingly [are] buying into the core idea that anything that's good for the banks will be bad for taxpayers," Hughes said.

The euro changed hands at $1.4625, up from $1.4488 late Friday, the highest in almost a month. The British pound surged to $1.8452, up from $1.8334.
The dollar also fell against Japan's currency, slipping to 106.50 yen from 107.28 yen.
U.S. lawmakers and Bush administration officials worked through the weekend to work out details of the plan.
The administration's proposal would allow the government to buy the bad debt of U.S. financial institutions for the next two years. It gives the Treasury secretary authority to buy $700 billion in mortgage-related assets, and would raise the statutory limit on the national debt from $10.6 trillion to $11.3 trillion. See full story.
Separately, the Treasury last week said it would insure publicly offered mutual funds that pay a fee, while the Federal Reserve will buy agency discount notes from primary dealers, acting as a backstop when and if money-market funds want to sell their assets. See earlier story.
"Many investors expect the government's efforts to work and leave the U.S. with a large debt, which foreign investors will be increasingly reluctant to finance at current prices," said Brown Brothers Harriman strategists in New York.
The dollar came under pressure Friday after initially rallying on news of a Washington-engineered rescue plan.
Sorting out the implications
The sheer scale of the proposed bailout has stirred concerns about the addition of massive levels of debt to the federal budget. More debt will likely weigh on the price of U.S. government bonds, sending yields higher.
"U.S. yields are likely to move higher in the medium term as the U.S. Treasury will be forced to issue bonds to finance its run of bailout packages," noted strategists at BNP Paribas.
Indeed, Treasury prices fell by the most in two decades on Friday, as investors sold in anticipation of lots of new supply coming on the market for U.S. government bonds. See full story.
International investors may respond to the prospect of holding U.S.-denominated paper in the face of expanding supply by turning to assets such as gold and other commodities, strategists at Bank of New York Mellon told clients.
"Such a shift in thinking is also likely to see investors favor currencies where the central banks retain an anti-inflationary stance and where there is a well-developed government bond market where they can leave their capital," they wrote. "The euro would seem the most likely home for such investment flows."
Meanwhile, coordinated efforts by the Federal Reserve and other major central banks unveiled last week to pump billions of additional dollars into money markets should serve to ease a near-term dollar shortage, analysts said. See full story.
"We continue to hold the view that the U.S. dollar liquidity provided outside the U.S. will reduce the liquidity squeeze in the short term and therefore lead to lower dollar demand," wrote Sven Schubert, a currency strategist at Credit Suisse in Zurich.
Japan's yen, meanwhile, continues to gain ground on renewed risk aversion, analysts said. End of Story
William L. Watts is a reporter for MarketWatch in London.
Deborah Levine is a MarketWatch reporter, based in New York.

Sunday, September 21, 2008

Treasury Seeks Asset-Buying Power Unchecked by Courts

By Alison Fitzgerald and John Brinsley

Sept. 21 (Bloomberg) -- The Bush administration sought unchecked power from Congress to buy $700 billion in bad mortgage investments from financial companies in what would be an unprecedented government intrusion into the markets.

Through his plan, Treasury Secretary Henry Paulson aims to avert a credit freeze that would bring the financial system and the world's largest economy to a standstill. The bill would prevent courts from reviewing actions taken under its authority.

``He's asking for a huge amount of power,'' said Nouriel Roubini, an economist at New York University. ``He's saying, `Trust me, I'm going to do it right if you give me absolute control.' This is not a monarchy.''

As congressional aides and officials scrutinized the proposal, the Treasury late yesterday clarified the types of assets it would purchase. Paulson would have authority to buy home loans, mortgage-backed securities, commercial mortgage- related assets and, after consultation with the Federal Reserve chairman, ``other assets, as deemed necessary to effectively stabilize financial markets,'' the Treasury said in a statement.

The Treasury would also have discretion, after discussions with the Fed, to make non-U.S. financial institutions eligible under the program.

The plan would raise the ceiling on the national debt and spend as much as the combined annual budgets of the Departments of Defense, Education and Health and Human Services. Paulson is asking for the power to hire asset managers and award contracts to private companies. Most provisions of the proposal expire after two years from the date of enactment.

Markets `Fragile'

Paulson today urged Congress to approve the relief program quickly, saying financial markets are ``fragile.'' While the plan should have ``mortgage relief components,'' he suggested legislative changes should be kept to a minimum.

``We want this to be clean, we want this to be quick,'' Paulson said on Fox News Sunday.

A failure by the government to support the U.S. financial system could lead to ``a depression,'' Senator Charles Schumer, a New York Democrat told reporters yesterday. ``To do nothing is to risk the kind of economic downturn this country hasn't seen in 60 years.''

The Treasury is seeking authority to step in as buyer of last resort for mortgage-linked assets that few other financial institutions in the world want to buy, following government takeovers of mortgage giants Fannie Mae and Freddie Mac and insurer American International Group Inc.

Pelosi Response

``Democrats will work with the administration to ensure that our response to events in the financial markets is swift,'' House Speaker Nancy Pelosi said in a statement.

The majority party will seek to reduce mortgage foreclosures and create ``fast-track authority'' for an overhaul of financial regulation, Pelosi said. Democrats will ensure ``the government is accountable to the taxpayers in any future actions under this broad grant of authority, implementing strong oversight mechanisms.''

The proposal will include curbs on executive pay for the companies whose assets the government will be buying, Steve Adamske, a spokesman for Representative Barney Frank, said yesterday in an interview.

Democrats also will include a plan to stem foreclosures, which may involve tapping the loan-modification abilities of the Federal Housing Administration, the Federal Deposit Insurance Corp., and Freddie Mac and Fannie Mae, Adamske said. Frank, a Democrat from Massachusetts, is chairman of the House Financial Services Committee.

Senate Majority Leader Harry Reid said that while he has misgivings about the rescue plan, ``the consequences of inaction could be catastrophic.''

`Furious' Boehner

``While the Bush proposal raises some serious issues, we need to resolve them quickly,'' he said yesterday in a statement. ``I am confident that, working together, we will.''

House minority leader John Boehner, an Ohio Republican, said yesterday he is reviewing the proposal but didn't say whether he was inclined to support it.

``The American people are furious that we're in this situation, and so am I,'' Boehner said in a statement. ``We need to do everything possible to protect the taxpayers from the consequences of a broken Washington.''

Congress, which may pass legislation as soon as Sept. 26, needs to ``make sure there are protections built in for taxpayers,'' said Schumer, a New York Democrat on the banking committee. Lawmakers should ensure ``taxpayers who gave the money will be put ahead of the stockholders, bondholders and others.''

Paulson is seeking an expansion of federal influence over markets that hasn't been seen since the Great Depression, said Charles Geisst, author of ``100 Years of Wall Street'' and a finance professor at Manhattan College in New York.

Hoover Era

Geisst likened the plan to the Reconstruction Finance Corp., which was chartered by Herbert Hoover in 1932 with the goal of boosting economic activity by lending money after credit markets seized up.

President George W. Bush said he called leaders in both houses of Congress and ``found a common understanding of how severe the problem is and how necessary it is to get something done quickly.''

``This is going to be a big package because it's a big problem,'' Bush said following a meeting with Colombian President Alvaro Uribe at the White House. ``We need to get this done quickly, and the cleaner the better.''

Democratic presidential nominee Barack Obama said in a radio address that he ``fully supports'' Paulson and Fed Chairman Ben S. Bernanke's efforts to stabilize the financial system. The plan, however, should benefit both main street and Wall Street, he said.

`Burden on Taxpayer'

Republican Presidential nominee John McCain ``looks forward'' to reviewing the proposal while focusing at least in part on ``minimizing the burden on the taxpayer,'' said Jill Hazelbaker, communications director for the McCain campaign.

The ban on legal challenges of actions by Treasury is ``distasteful, it's unfortunate and it's bad precedent, but this is an emergency and you have to act,'' said Jerry Markham, a law professor at Florida State University and author of ``A Financial History of the United States.''

``What you don't want happen is to have lawsuits that will slow things down and cause problems,'' he said.

The proposal would raise the nation's debt ceiling to $11.315 trillion from $10.615 trillion and require the Treasury secretary to report back to Congress three months after Treasury first uses its new powers, and then semiannually after that.

Hiring Authority

Paulson would gain discretion to act as he ``deems necessary'' to hire people, enter into contracts and issue regulations related to a revival of U.S. mortgage finance, according to a three-page proposal. The Treasury would ``take into consideration'' protecting taxpayers and promoting market stability.

The Treasury may hire managers to purchase the assets through so-called reverse auctions, seeking the lowest prices, Treasury said yesterday. The document specifies that Treasury may buy only assets issued or originated on or before Sept. 17.

The House will pass legislation to implement the plan by the end of this week, and the Senate will act soon after, Frank said on Sept. 19 in an interview on Bloomberg Television's ``Political Capital with Al Hunt.''

Bush said yesterday he's unconcerned that the price tag on the package may seem high.

``I'm sure there are some of my friends out there that are saying, `I thought this guy was a market guy, what happened to him?''' the president said. ``My first instinct was to let the market work, until I realized, while being briefed by the experts, how significant this problem became.''

The Bush administration seeks ``dictatorial power unreviewable by the third branch of government, the courts, to try to resolve the crisis,'' said Frank Razzano, a former assistant chief trial attorney at the Securities and Exchange Commission now at Pepper Hamilton LLP in Washington. ``We are taking a huge leap of faith.''

To contact the reporter on this story: Alison Fitzgerald in Washingtont ; John Brinsley in Washington at jbrinsley@bloomberg.net
Last Updated: September 21, 2008 10:03 EDT

Thursday, September 18, 2008

Wall Street Digest Hotline Update

This is The Wall Street Digest Hotline Update for Wednesday, September 17, 2008, at 6:00 p.m. EST.

The short-sellers ganged up on the financial sector today. At the closing bell, the Dow sank 449 points, closing at 10,609, while the Nasdaq fell 109 points, closing at 2,098. The S&P 500 dropped 57 points, closing at 1,156. Oil closed $6.01 higher at $97.16 per barrel, and gold closed up $70.00 higher at $850.50 an ounce.

The SEC just issued new rules on naked short selling. That should substantially reduce market volatility.

From the opening bell today, it was clear that Wall Street was not impressed with an $89 billion loan at 11 percent to AIG, a company with a trillion dollars in assets. Even worse the Fed is not replacing liquidity as fast as it is evaporating in the form of rapidly depreciating debt. Also, the banks don’t want to lend because they may not be repaid in the current environment. Gold jumped $88 intraday as investors dumped stocks and purchased gold & silver in a flight to safety.

Everything that is happening today (Bear Sterns, Fannie & Freddie, IndyMac Bank, Lehman Brothers) is a symptom of the real problem, which is the enormous level of defaulting debt. There is almost $600 trillion in derivatives debt, over $2.5 trillion in credit card debt, and $58 trillion in credit default swaps. We are witnessing the very beginning of a worldwide credit-market meltdown. Long-term, the banking and financial sectors may not bottom anytime soon.

We sold the last three positions in our portfolio at the opening bell this morning. You should be 100 percent cash today.

The next Hotline Update will be on Friday, September 19, 2008, at 6:00 p.m. EST.

Tuesday, September 16, 2008

Wall Street Digest Hotline Update

This is The Wall Street Digest Hotline Update for Tuesday, September 16, 2008, at 6:00 p.m. EST.

Stock prices were volatile today, but the good news is that AIG survived for another day. At the closing bell, the Dow jumped 141 points, closing at 11,059, while the Nasdaq gained almost 28 points, closing at 2,207. The S&P 500 closed almost 20 points higher at 1,213. Oil closed $4.56 lower at $91.15 per barrel, and gold closed $6.50 lower at $780.50 an ounce.

But here is the bad news:

Everything that is happening today (Bear Sterns, Fannie & Freddie, IndyMac Bank, Lehman Brothers) is a symptom of the real problem, which is the enormous level of defaulting debt. There is almost $600 trillion in derivatives debt, over $2.5 trillion in credit card debt, and $58 trillion in credit default swaps. We are witnessing the very beginning of a worldwide credit-market meltdown. Long-term, the banking and financial sectors may not bottom anytime soon.

Wall Street fears that the Fed and/or the Treasury will allow AIG to fail. That would create a financial mess that could trigger a financial meltdown.

First, tomorrow morning let's sell all remaining positions so we are 100 percent cash at the end of the day.

On Wednesday's hotline I will provide you with ETFs that will allow you to short the market and the sectors by 100 percent and 200 percent.

The next Hotline Update will be on Wednesday, September 17, 2008, at 6:00 p.m. EST.

Sunday, September 7, 2008

Wall Street Digest Hotline Update

This is The Wall Street Digest Hotline Update for Friday, September 5, 2008, at 6:00 p.m. EST.

Disappointing employment figures pushed stock prices down dramatically this morning. The financial sector rebounded in the afternoon and cut losses. At the closing bell, the Dow gained almost 33 points, closing at 11,220 while the Nasdaq fell 3 points, closing at 2,255. The S&P 500 closed 5 points higher at 1,242. Oil closed $1.66 lower at $106.23 per barrel, and gold closed $0.30 lower at $803.50 an ounce.

The unemployment rate inched up to 6.1 percent. Since January, 600,000 jobs have been lost. August auto sales were down again. GM fell 20.3 percent, Ford fell 26.5 percent Chrysler fell 34.5 percent, Honda fell 7.3 percent, and Toyota fell 9.4 percent. Nissan bucked the trend and gained 13.6 percent in August.

September is the worst month of the year for stock prices. I expect a sell-off in September because of adverse down-market cycles, which should bottom on or before October first. I see no reason to add positions to our portfolio until after the market bottom.

I would continue to avoid the money center banks, the brokerage and financial sectors, and the commodity area.

Home prices will continue to fall. I don't see a housing bottom until late 2009, at the earliest. The Fed must supply greater liquidity to the banking system. And Congress, sooner-or-later, will have to pass a deep tax cut to accelerate economic growth. That is a tall order with our do-nothing Congress.

I will continue to trim positions from our portfolio as needed. Stay close to our Tuesday/Friday Hotline Updates.

The next Hotline Update will be on Tuesday, September 9, 2008, at 6:00 p.m. EST.

Friday, August 22, 2008

Wall Street Digest Hotline Update

This is The Wall Street Digest Hotline Update for Tuesday, August 19, 2008, at 6:00 p.m. EST.

The last of the short-term market cycles are bottoming today. Hopefully, the sun will come out tomorrow. At the closing bell, the Dow plunged almost 131 points, closing at 11,348, while the Nasdaq fell 32 points, closing at 2,384. The S&P 500 closed almost 12 points lower at 1,266. Oil closed $1.66 higher at $114.53 per barrel, and gold closed $11.10 higher at $816.80 an ounce.

Stock prices fell today after inflation exceeded forecasts. Producer prices climbed the most since 1981. U.S. home builders broke ground on the fewest homes in 17 years. Work began on 30 percent fewer homes. July building permits, a sign of future construction, were down 18 percent in comparison to July 2007 building permits.

I will be adding new positions to our portfolio as new market leadership evolves. Biotechnology, medical equipment, and medical delivery are the current leaders. I would continue to avoid the money center banks, the brokerage and financial sectors, and the commodity area.

With slowing economic growth, home prices will continue to fall. I don't see a housing bottom until late 2009, at the earliest. The Fed must supply greater liquidity to the banking system. And Congress, sooner or later, will pass a deep tax cut to accelerate economic growth.

Stay close to our Tuesday/Friday Hotline Updates. I will continue to adjust our portfolio as needed.

The next Hotline Update will be on Friday, August 22, 2008, at 6:00 p.m. EST.

Builders' stocks rise as home sales fall


Updated 2/29/2008 9:46 AM

By Matt Krantz, USA TODAY
The news from the housing market keeps getting worse, but you wouldn't know it by looking at home-builders' stocks.

Shares of home builders gained Wednesday, continuing a head-turning performance this year. Even housing pessimists can't overlook a recent run that has:

•Pushed the Standard & Poor's (MHP) home-building index up 24.6% this year, making it the top-performing industry in 2008.

HOUSING NEWS: Sales and prices of new homes continue descent

•Created huge individual winners. Three of the five best gainers in the S&P 500 this year are home builders: Pulte, (PHM) at No. 1, is up 51%; D.R. Horton, (DHI) at No. 3, has gained 30%; and No. 5 KB Home (KBH) is up 26%.

Defied bad news. Wednesday, for instance, the government reported sales of new single-family homes in the country fell to a 13-year low. Meanwhile, Toll Bros., (TOL) a builder of high-end homes, reported a quarterly loss of $96 million on 23% lower revenue.

But that didn't faze the stocks. Toll shares rose 71 cents, or 3.1%, to $23.83. The iShares Dow Jones U.S. Home Construction exchange-traded fund, which tracks the industry, rose 1.4%, while the broad S&P 500 index fell 0.1% to 1380.

Housing has been one of Wall Street's concerns.

If the recovery in building stocks proves more than a short-term rally off depressed levels, analysts say it could bolster confidence in the broad market.

"It seems investors are starting to look ahead to see things will pick up (in housing) in the second half" of 2008, says Paul Hickey, co-founder of Bespoke Investment Group.

The optimists are betting the Federal Reserve's five-consecutive cuts to short-term interest rates since last September, and hints more may be on the way, will help the housing market stabilize, Hickey says.

Wednesday, regulators also authorized Fannie Mae (FNM) and Freddie Mac, (FRE) the biggest funders of mortgages, to buy more home loans.

But while some investors desperately want home-building stocks to bounce back, there are plenty of skeptics who say it's a mirage.

The 1,400% run-up in home-building stocks from 2000 to 2005 and subsequent 80% crash was nearly identical to the rise in dot-com stocks from 1995 to 2000 before the bubble burst, says James Stack of InvesTech Research.

Technology stocks rallied many times before finally bottoming in 2002, which Stack also expects with home-builders' shares. That's not to mention the big stockpile of unsold homes. "I'm skeptical we've hit bottom," he says.

In addition, it's unlikely for a former bubble industry, this time housing, to lead the market for a sustainable period this soon, says Bryan Sadoff of Sadoff Investment Management.

And that's why investors such as Ronald Muhlenkamp, portfolio manager of Muhlenkamp & Co., (MUHLX) still don't trust the rally. "We're waiting and seeing," he says.

Wednesday, August 20, 2008

Crude prices crank open prosperity spigot in Texas town

By Betsy Blaney and Alicia A. Caldwell, The Associated Press
KERMIT, Texas — Around the country, Americans are tightening their belts, scrapping vacation plans, eating more dinners at home, getting rid of their SUVs and watching "for sale" signs linger on front lawns. But in oil-and-gas-rich West Texas, folks are living large — again.

Most homes sell quickly and command premium prices. Hotel rooms are in scant supply. Gas guzzlers are rolling off auto dealers' lots. Jobs are plentiful in the oil and gas fields and the businesses that serve them.

Drillers and energy companies are reaping a bonanza from the run-up in oil that pushed the price past $140 a barrel this summer. This oil town of just over 5,100 people about 45 miles west of Odessa is awash in prosperity, and it's the same story across the rest of the Permian Basin, where about 20% of U.S. oil is produced.

So far, the boom has brought in hundreds of millions dollars to the region and more than 26,000 new jobs. In Midland and Odessa, the backbone of the region, the unemployment rates are the lowest in Texas, at just over 3.1% and 3.7% for July. That compares with 4.7% statewide and a U.S. average of 5.7%. "Help wanted" signs hang outside many restaurants, which frequently must turn away diners or close off sections when the crush of customers overwhelms the staff.

"There's just not enough people to work in the restaurants. The pay is so much better" in the oil fields, said Roy Gillean, owner of the Barn Door Steakhouse in Odessa and head of the Permian Basin chapter of the Texas Restaurant Association.

While plummeting home prices and record-high foreclosures have hit neighborhoods across the USA, this region is seeing the opposite. In Midland County, homes typically stay on the market for only a month, and prices are up 16.5% from last year.

Jed Heard, owner of a Cadillac dealership in Midland, said it's not unusual for someone to plunk down $65,000 in cash for a sport-utility vehicle.

The dealership said it set a sales record last year, and July's numbers are 18% ahead of July 2007.

Boom times are not new here. Neither are busts, and many people in and out of the oil business — home builders and developers among them — know the good times may not last.

Vida Simpson, a 59-year-old Kermit-area native, recalled earlier oil heydays, when the town had several grocery stores, two movie theaters and a slew of other shops. But the mother of two grown children also remembered the bust and the demise of her family furniture store. And she recalled the unfortunate young people who took oil-field jobs instead of going to college.

"I'm just fearful that they don't get caught up on a trap, like they did before," Simpson said.
Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Foreclosures boost Bay Area home sales

MEDIAN PRICE IN VALLEY DIVES 19.7% FROM LAST YEAR
By Sue McAllister
Mercury News
Article Launched: 08/20/2008 01:30:34 AM PDT

Bargain-hunting home buyers scooping up foreclosure properties deserve credit for some rare good news about the battered Bay Area housing market: Home sales in the region were better last month than they were a year ago, the first time that's happened since 2005.

But in Santa Clara County, where the foreclosure problem is less severe, home sales were down 13 percent compared with July 2007, according to a report Tuesday from MDA DataQuick. That decline was less pronounced than in recent months.

Median prices, meanwhile, took a dive throughout the nine-county Bay Area, partly as a result of surging sales of low-priced homes. Of the previously owned homes sold in the nine-county region in July, one-third had been foreclosed upon in the past year.

"The good news about this is we're able to put first-time home buyers into all these REOs," said Joe Brown, president of realty brokerage Coldwell Banker Silicon Valley. "REO" means the property is "real estate owned" by a bank that has foreclosed upon it.

Around the Bay Area, the median price of the previously owned houses that changed hands in July tumbled 34 percent from a year earlier, to $485,000. In Santa Clara County, the median price slid to $646,500, 19.7 percent less than the July 2007 figure of $805,500. Condo prices in the county declined 16.5 percent to $430,000.

Certainly, one reason for the sharp price drops is that many homes have lost value. But a drastic change in "market mix" has exacerbated the plunge.

"All the cheap stuff out there is getting scooped up by people," said John Karevoll of DataQuick. Generally speaking, "the expensive stuff is on hold."

In July 2007, the opposite was true. Easy financing for no-money-down buyers had already dried up, so most sales that occurred were of more expensive homes, which drove the median price up. So the gap between median prices in summer 2007 and today is that much wider.

Software architect Yang Tang, a Santa Clara County resident who is relocating to San Francisco for a new job, just bought a one-bedroom condo in the Mission District after four months of looking with his agent, Hsin Feng of Coldwell Banker in Cupertino.

'Waiting game'

He's paying about $450,000 for the 700-square-foot home, which was previously foreclosed upon. As recently as April, "I think the same kind of places would have been right around $600,000 for one-bedroom, one-bath loft condos," he said. "It was a waiting game for those to come down to my price range."

Homeowners may wince at the recent slump in median prices, but the regional increase in sales - led by Contra Costa and Solano counties - should lift their spirits a bit. A total of 7,586 new and resale houses and condos changed hands in the Bay Area last month, up about 6 percent from June, and up 2.2 percent from 7,178 sales in July 2007. As buyers help reduce the supply of homes for sale, prices can begin to stabilize.

In parts of Santa Clara County hardest hit by foreclosures, sales have accelerated this summer as prices have fallen.

In September, for example, sales were so slow and for-sale homes so plentiful that it would have taken more than two years to sell all the houses on the market in Central, South and East San Jose. Now, given the sales pace and inventory over the past several weeks, it would take less than five months.

In Gilroy and Morgan Hill, there was a year's worth of houses for sale in mid-March, but today the supply is down to five months as well.

'Improved market'

"It's a dramatically improved market in those areas," said Richard Calhoun, who tracks the inventory trends using data from the multiple listing service.

Intero agent Paul B. Newman said multiple listing data shows that in South San Jose, for example, only 18 houses closed escrow in April, but the number rose to 47 closed sales in July.

"Values have dropped to a point where investors are coming in and buying those properties because they can get positive cash flow now," Newman said. That means the monthly rent for the properties is more than the investor-owner will spend on mortgage and tax expenses.

Coldwell Banker's Brown said it's hard to forecast fall's real estate market.

"Traditionally, we have a little bump after Labor Day, but we've had a bump in summertime, and we have these REOs coming online every day," he said. Brown said the "eternal optimist" in him wants to believe the surge in sales will continue through autumn.

Then again, he said, "there are so many moving parts, the dollar, the price of oil. We do not have the liquidity issue solved" - meaning mortgages are not always easy to obtain - "and yet we're having these sales. That points to some pent-up demand."

Contact Sue McAllister at smcallister@mercurynews.com or (408) 920-5833.

Monday, August 18, 2008

Despite declines, Silicon Valley still has most costly U.S. housing, survey says

STRONG JOB GROWTH SUPPORTS PRICE LEVELS IN SAN JOSE AREA
By Sue McAllister
Mercury News
Article Launched: 08/14/2008 03:49:41 PM PDT

Don't let those "price reduced" signs get you thinking that homeownership in Silicon Valley is a bargain: The San Jose metro area is still the nation's most expensive housing market, according to a national survey released Thursday.

True, the median price of houses sold in the San Jose metro area in the second quarter fell nearly 13 percent compared with a year earlier. But despite the decline, the median price of $755,000 was the highest of any metropolitan area in the country, a report from the National Association of Realtors said.

"The price decline in San Jose, relatively speaking by California standards, is more modest than in Southern California or Sacramento, because of the much stronger job growth," said Lawrence Yun, chief economist for the Realtors trade group.

The San Francisco metro area had the nation's second-most-expensive prices, with a median of $636,000, down 19 percent from the second quarter of 2007. Foreclosures in the eastern part of that metro area helped drag down the median price significantly; the metro area includes San Francisco, Marin, San Mateo, Alameda and Contra Costa counties. The San Jose metro area includes Santa Clara and San Benito counties.

The Sacramento-Roseville metro area earned the unwelcome distinction of having the country's most severe home price depreciation in the second quarter. Median prices fell nearly 36 percent from a year earlier, hitting $229,500. Riverside-San Bernardino posted a 33 percent decline, and the Los Angeles and Anaheim areas had decreases of more than 20 percent.

While most California home values deteriorated in the April-to-June period, median prices actually rose in nearly one-quarter of the metro areas represented in the Realtors report. Among those with biggest increases were Yakima, Wash., where an 8.9 percent gain brought the median price to $162,300. In Binghamton, N.Y., prices climbed 8.7 percent to $120,900.

In the states with the steepest price declines, buyers are coming back to the market, Yun said. There were 26 percent more sales in California in the second quarter than in the first, and 25 percent more in Nevada, for example.

To read the report and data tables, visit www.realtor.org.

Contact Sue McAllister at smcallister@mercurynews.com or (408) 920-5833.

Wednesday, August 13, 2008

In a Generation, Minorities May Be the U.S. Majority

By SAM ROBERTS
Published: August 13, 2008
Ethnic and racial minorities will comprise a majority of the nation’s population in a little more than a generation, according to new Census Bureau projections, a transformation that is occurring faster than anticipated just a few years ago.

The census calculates that by 2042, Americans who identify themselves as Hispanic, black, Asian, American Indian, Native Hawaiian and Pacific Islander will together outnumber non-Hispanic whites. Four years ago, officials had projected the shift would come in 2050.

The main reason for the accelerating change is significantly higher birthrates among immigrants. Another factor is the influx of foreigners, rising from about 1.3 million annually today to more than 2 million a year by midcentury, according to projections based on current immigration policies.

“No other country has experienced such rapid racial and ethnic change,” said Mark Mather, a demographer with the Population Reference Bureau, a research organization in Washington.

The latest figures, which are being released on Thursday, are predicated on current and historical trends, which can be thrown awry by several variables, including prospective overhauls of immigration policies and sudden increases in refugees.

A decade ago, census demographers estimated that the nation’s population, which topped 300 million in 2006, would not surpass 400 million until sometime after midcentury. Now, they are projecting that the population will top 400 million in 2039 and reach 439 million in 2050.

So-called minorities, the Census Bureau projects, will constitute a majority of the nation’s children under 18 by 2023 and of working-age Americans by 2039.

For the first time, both the number and the proportion of non-Hispanic whites, who now account for 66 percent of the population, will decline, starting around 2030. By 2050, their share will dip to 46 percent.

Higher mortality rates among older native-born white Americans and higher birthrates rates among immigrants and their children are already driving ethnic and racial disparities.

“A momentum is built into this as a result of past immigration,” said Jeffrey S. Passel, senior demographer at the Pew Hispanic Center. “In the 1970s, ’80s and ’90s, there were more Hispanic immigrants than births. This decade, there are more births than immigrants. Almost regardless of what you assume about future immigration, the country will be more Hispanic and Asian.”

With the Census Bureau forecasting even more immigrants, other demographers estimate that the proportion of foreign-born Americans, now about 12 percent, could surpass the 1910 historic high of nearly 15 percent by about 2025 and may approach 20 percent in 2050.

According to the new forecast, by 2050, the number of Hispanic people will nearly triple, to 133 million from 47 million, to account for 30 percent of Americans, compared with 15 percent today.

People who say they are Asian, with their ranks soaring to 41 million from 16 million, will make up more than 9 percent of the population, up from 5 percent.

More than three times as many people are expected to identify themselves as multiracial — 16 million, accounting for nearly 4 percent of the population.

The population of people who define themselves a black is projected to rise to 66 million from 41 million, but increase its overall share by barely two percentage points, to 15 percent.

“What’s happening now in terms of increasing diversity probably is unprecedented,” said Campbell Gibson, a retired census demographer.

Several states, including California and Texas, have already reached the point where members of minorities are in the majority.

“Within the conventional definition of race, of white, black, Asian, minority vs. non-minority, this is a big change,” said David G. Waddington, chief of the Census Bureau’s population projections branch.

All the projections are subject to changing cultural definitions. The share of Americans who identify themselves as white, regardless of their ethnicity, will remain largely unchanged, declining from less than 80 percent in 2010 to about 76 percent when the majority-minority benchmark is reached in 2042.

“The way people report race 20 or 30 years from now may be very different,” Dr. Waddington pointed out.

The Census Bureau’s projections are likely to fuel debates over immigration policy, overpopulation and the changing electorate, and recall earlier eras when the Irish, the Italians and Eastern European Jews were not universally considered as whites. As recently as the 1960s, Hispanic people were not counted separately by the census and Asian Indians were classified as white.

William H. Frey, a demographer with the Brookings Institution, said that by the 2028 presidential election, racial and ethnic minorities will constitute a majority of adults between the ages of 18 and 29 for the first time.

Two years later, when all the baby boomers will have turned 65, nearly 20 percent of Americans, compared with fewer than 13 percent today, will be over 65. By 2050, about 89 million Americans will be in that group, more than double the number today.

“In 2020, the burdens of seniors to the white working-aged population become larger than the burdens of children,” Dr. Frey said.

The changes projected by the census point toward a nation in which the older population will be whiter (deaths will outnumber births among whites, beginning in the 2020s) and where black Americans will still have slightly higher rates of infant mortality and lower life expectancy.

Steven A. Camarota, research director for the Center for Immigration Studies, which favors limits on immigration, expressed concern about congestion and other issues related to population growth driven by the foreign-born.

Gregory Rodriguez, a senior fellow at the New America Foundation, a public policy institute, argued that while “assimilation became a dirty word in the 1960s and ’70s,” America has always been evolving and becoming enriched by new cultures, whether from Europe or from South America and Asia.

Indeed, Dr. Gibson, the retired census demographer, once estimated that in 1492 about 96 percent of the inhabitants of what is now the United States were American Indian and the rest of Polynesian origin. Well before the English landed in Jamestown, the Spanish became America’s first minority.

When the first census was conducted in 1790, about 64 percent of the people counted were white, a bit more than half of whom were of English origin. By 1900, about 9 in 10 Americans were non-Hispanic white, mostly of European ancestry.

The share of Americans who can trace their roots to immigrants directly from Europe has been shrinking. The federal Office of Management and Budget now defines whites as descendants of “the original peoples of Europe, North Africa or the Middle East.” Hispanic or Latino people, according to the same government agency, are of “Mexican, Puerto Rican, Cuban, Central or South American or other Spanish culture.”

“We may be using the same words 50 years from now,” said Mr. Passel, of the Pew Center, “but I feel confident in saying they’ll mean something different.”

Wednesday, August 6, 2008

Hundreds of banks will fail, Roubini tells Barron's

Sun Aug 3, 2008 3:52pm EDT

NEW YORK, Aug 3 (Reuters) - The United States is in the second inning of a recession that will last for at least 18 months and help kill off hundreds of banks, influential economist and New York University Professor Nouriel Roubini told Barron's in Sunday's edition.

Taxpayers will pay a big price for helping bail out the rest of the financial services industry as well, Roubini said -- at least $1 trillion and more likely $2 trillion.

The banks will become insolvent because of mounting losses as a result of the housing bust and because they have only written down their subprime loans so far, he said. Still in front of them are their consumer-credit losses, for which they lack the reserves, Barron's reported.

He also said there are hundreds of millions of dollars outstanding in home-equity loans that could be worth zero, too.

U.S. consumers, meanwhile, are "shopped out" and saving less, while the Federal Reserve's performance in handling the crisis has been poor, Roubini said, because it failed to see that the problem extended beyond subprime mortgage debt.

Now, Roubini told Barron's, the government is overregulating, bailing out troubled participants and intervening in every market.

"The regulators should investigate themselves for bailing out Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz), the creditors of Bear Stearns and the financial system with new lending facilities. They have swapped U.S. Treasury bonds for toxic securities," he told Barron's. "It is privatizing the gains and profits, and socializing the losses as usual. This is socialism for Wall Street and the rich."

He said that sometimes it is necessary to use public money to rescue institutions, but in a way that does not bail out the people who made the mistakes. "In each one of these episodes, the government bailed out the shareholders, the bondholders, and to some degree, management," Roubini told Barron's.

As for the banks that will go bankrupt, they will include community banks that finance homes, stores, downtown areas, commercial real estate and other mainstays of U.S. towns and cities, Roubini said.

"Of three dozen or so medium-sized regional banks, a good third are in distress," he told Barron's, saying half of the group could go bankrupt. Some big banks could wind up insolvent, he added, but said they might be deemed too big to fail.

Nouriel stressed that he is "quite bullish" about the state of the global economy and that he is positive about the medium and long term.

(Reporting by Robert MacMillan, editing by Martin Golan)

Tuesday, August 5, 2008

Wall Street Digest Hotline Update

This is The Wall Street Digest Hotline Update for Friday, August 1, 2008, at 6:00 p.m. EST.

Oil prices were up slightly today, while stock prices were down slightly. At the closing bell, the Dow lost 51 points, closing at 11,326, while the Nasdaq fell 14 points, closing at 2,310. The S&P 500 closed 7 points lower at 1,260. Oil closed $1.02 higher at $125.10 per barrel, and gold closed $5.20 lower at $917.50 an ounce.

This week's unemployment report indicated that 51,000 jobs disappeared in July, inching the unemployment rate higher to 5.7 percent.

The price of oil continues to weigh on the market. GM announced a $15.5 billion quarterly loss, along with a 32.4 percent sales decline in July. Ford sales were down 21.5 percent; and Toyota was down 18.7 percent. Chrysler was also down 34.2 percent in July.

With slowing economic growth, home prices will continue to fall. 2.5 million homes will face foreclosure over the next twelve months. I don't see a housing bottom until late 2009, at the earliest.

Keep in mind that market bottoms in August and September are rare. I will continue to trim positions from our portfolio as needed. Biotechnology is the new market leader. Stay close to our Tuesday/Friday Hotline Updates.

The next Hotline Update will be on Tuesday, August 5, 2008, at 6:00 p.m. EST.

Thursday, July 24, 2008

Bankruptcies soar in Santa Clara County as homeowners struggle with mortgages, credit cards

By Sonia Narang
Mercury News
Article Launched: 07/24/2008 08:51:45 PM PDT



Like many others caught in the housing crisis, Arthur was on the verge of losing his $600,000 home to foreclosure.

This month, nearing $1 million in debt, the veteran real estate agent and San Jose father of three filed for Chapter 13 bankruptcy.

"I have taken upward of 25 phone calls a day from creditors," he said. "When you have 25 people grinding on you day after day, it takes a toll."

Arthur can add himself to the list of 5,941 people who filed for bankruptcy in the San Jose Division of U.S. Bankruptcy Court from July 2007 through June 2008. Of the four Bay Area bankruptcy courts, San Jose's - which oversees Santa Clara, Santa Cruz, San Benito and Monterey counties - posted the highest increase in bankruptcies - 69.7 percent - over the 12 previous months.

Once, job loss, massive medical bills or divorce were the primary reasons people declared bankruptcy. Now, a growing number of filings are related to the housing crisis, say local judges, attorneys and credit counselors.

In Santa Clara County, the most dramatic rise was seen in Chapter 7 cases, which allow people to relieve their debt by liquidating all assets and property. Those filings jumped to 1,046 from January through June this year, up 86 percent compared with the same time last year.

Chapter 13 filings rose to 688, a 44 percent increase from the same time last year. In Chapter 13, debtors set up a plan to pay off creditors over three to five years.

And countywide in the first half of the year, there were 31 Chapter 11 filings, used by businesses striving to stay open - double the number in the same period last year.
For people like Arthur, who asked not to be fully identified, it started with a home he bought 10 years ago for about $450,000. As its value rose to $900,000, he used the equity to start his own business. Along the way, the home's value dropped to $600,000, and business expenses rose. In order make his mortgage payments, Arthur began relying on credit cards - at least 20 - for living expenses.

Recently, he shut down his business and, unable to pay his mounting credit card debt, Arthur opted for bankruptcy.

It's a similar story for a growing number of Bay Area homeowners, but Arthur at least has some hope of keeping his home. Bankruptcy judges say many others are being forced to give theirs up to pay off credit card debt.

"What's different about this new wave is the number of people who are simply walking away from their houses," said the Northern District's Chief Bankruptcy Judge Randall Newsome, who has overseen bankruptcy filings for two decades.

"It's unlike anything I've ever seen in my career."

"People know there's no hope" of holding onto their homes, said San Jose bankruptcy judge Marilyn Morgan. In fact, 90 percent of today's debtors facing foreclosure don't even contest it, she said.

Morgan, in particular, attributes the steep numbers to the wave of subprime loans - loans made to borrowers who don't qualify for the lowest interest rates because of bad credit.

Others agree. "A lot of borrowers who got these loans were told by lenders that house values would go up," said veteran San Jose bankruptcy attorney Ike Shulman. When home values decreased and mortgage payments rose, foreclosures set in.

Others say that's not the only reason for the spike in bankruptcy filings. A change in U.S. bankruptcy legislation in October 2005 tightened requirements for filing. Initially, experts said, that led to a drop in filings nationwide.

But by April 2007, the numbers rose again, partly after lawyers recognized ways to get their clients' cases filed. The creeping housing and credit crisis saw filings snowball.

The local numbers parallel what's happening nationwide.

The American Bankruptcy Institute reported last month that U.S. consumer bankruptcy filings increased 30 percent in the first half of this year compared with the same period a year ago.

But for now, at least, the numbers don't rival what the Bay Area and nation witnessed in the late 1990s, when credit became readily available and more Americans started relying on credit cards. That's when bankruptcy filings soared to record highs. In the San Jose Division, filings exceeded 10,000 in 1998.

While filing for bankruptcy allows people to start fresh and remove the pressure of a large debt, the consequences are harsh. The bankruptcy will remain on a debtor's credit history for a decade, Williams said. And it can take years for bankruptcy filers to build up their credit again. Mortgage experts say it typically takes at least two years of re-established credit to qualify for a home loan.

Wednesday, July 23, 2008

Motorhead





Johnathan Goodwin can get 100 mpg out of a Lincoln Continental, cut emissions by 80%, and double the horsepower. Does the car business have the guts to follow him?



By: Clive Thompson

“Check it out. It's actually a jet engine," says Johnathan Goodwin, with a low whistle. "This thing is gonna be even cooler than I thought." We're hunched on the floor of Goodwin's gleaming workshop in Wichita, Kansas, surrounded by the shards of a wooden packing crate. Inside the wreckage sits his latest toy--a 1985-issue turbine engine originally designed for the military. It can spin at a blistering 60,000 rpm and burn almost any fuel. And Goodwin has some startling plans for this esoteric piece of hardware: He's going to use it to create the most fuel-efficient Hummer in history.

Goodwin, a 37-year-old who looks like Kevin Costner with better hair, is a professional car hacker. The spic-and-span shop is filled with eight monstrous trucks and cars--Hummers, Yukon XLs, Jeeps--in various states of undress. His four tattooed, twentysomething grease monkeys crawl all over them with wrenches and welding torches.

Goodwin leads me over to a red 2005 H3 Hummer that's up on jacks, its mechanicals removed. He aims to use the turbine to turn the Hummer into a tricked-out electric hybrid. Like most hybrids, it'll have two engines, including an electric motor. But in this case, the second will be the turbine, Goodwin's secret ingredient. Whenever the truck's juice runs low, the turbine will roar into action for a few seconds, powering a generator with such gusto that it'll recharge a set of "supercapacitor" batteries in seconds. This means the H3's electric motor will be able to perform awesome feats of acceleration and power over and over again, like a Prius on steroids. What's more, the turbine will burn biodiesel, a renewable fuel with much lower emissions than normal diesel; a hydrogen-injection system will then cut those low emissions in half. And when it's time to fill the tank, he'll be able to just pull up to the back of a diner and dump in its excess french-fry grease--as he does with his many other Hummers. Oh, yeah, he adds, the horsepower will double--from 300 to 600.

"Conservatively," Goodwin muses, scratching his chin, "it'll get 60 miles to the gallon. With 2,000 foot-pounds of torque. You'll be able to smoke the tires. And it's going to be superefficient."

He laughs. "Think about it: a 5,000-pound vehicle that gets 60 miles to the gallon and does zero to 60 in five seconds!"

This is the sort of work that's making Goodwin famous in the world of underground car modders. He is a virtuoso of fuel economy. He takes the hugest American cars on the road and rejiggers them to get up to quadruple their normal mileage and burn low-emission renewable fuels grown on U.S. soil--all while doubling their horsepower. The result thrills eco-evangelists and red-meat Americans alike: a vehicle that's simultaneously green and mean. And word's getting out. In the corner of his office sits Arnold Schwarzenegger's 1987 Jeep Wagoneer, which Goodwin is converting to biodiesel; soon, Neil Young will be shipping him a 1960 Lincoln Continental to transform into a biodiesel--electric hybrid.

His target for Young's car? One hundred miles per gallon.

This is more than a mere American Chopper--style makeover. Goodwin's experiments point to a radically cleaner and cheaper future for the American car. The numbers are simple: With a $5,000 bolt-on kit he co-engineered--the poor man's version of a Goodwin conversion--he can immediately transform any diesel vehicle to burn 50% less fuel and produce 80% fewer emissions. On a full-size gas-guzzler, he figures the kit earns its money back in about a year--or, on a regular car, two--while hitting an emissions target from the outset that's more stringent than any regulation we're likely to see in our lifetime. "Johnathan's in a league of his own," says Martin Tobias, CEO of Imperium Renewables, the nation's largest producer of biodiesel. "Nobody out there is doing experiments like he is."

Nobody--particularly not Detroit. Indeed, Goodwin is doing precisely what the big American automakers have always insisted is impossible. They have long argued that fuel-efficient and alternative-fuel cars are a hard sell because they're too cramped and meek for our market. They've lobbied aggressively against raising fuel-efficiency and emissions standards, insisting that either would doom the domestic industry. Yet the truth is that Detroit is now getting squeezed from all sides. This fall, labor unrest is brewing, and after decades of inertia on fuel-economy standards, Congress is jockeying to boost the target for cars to 35 mpg, a 10 mpg jump (which is either ridiculously large or ridiculously small, depending on whom you ask). More than a dozen states are enacting laws requiring steep reductions in greenhouse-gas emissions. Meanwhile, gas prices have hovered around $3 per gallon for more than a year. And European and Japanese carmakers are flooding the market with diesel and hybrid machines that get up to 40% better mileage than the best American cars; some, such as Mercedes's new BlueTec diesel sedans, deliver that kind of efficiency and more horsepower.

General Motors, Ford, and Chrysler, in short, have a choice: Cede still more ground--or mount a technological counterattack.

Goodwin's work proves that a counterattack is possible, and maybe easier than many of us imagined. If the dream is a big, badass ride that's also clean, well, he's there already. As he points out, his conversions consist almost entirely of taking stock GM parts and snapping them together in clever new ways. "They could do all this stuff if they wanted to," he tells me, slapping on a visor and hunching over an arc welder. "The technology has been there forever. They make 90% of the components I use." He doesn't have an engineering degree; he didn't even go to high school: "I've just been messing around and seeing what I can do."

All of which raises an interesting possibility. Has this guy in a far-off Kansas garage figured out the way to save Detroit?

America's most revolutionary innovations, it has long been said, sprang from the ramshackle dens of amateurs. Thomas Edison was a home-schooled dropout who got his start tinkering with battery parts; Chester Carlson invented the photocopier in his cramped Long Island kitchen. NASA, desperate for breakthroughs to help it return to the moon, has set up million-dollar prizes to encourage private citizens to come forward with any idea, no matter how crazy. As the theory goes, only those outside big industries can truly reinvent them.

Goodwin is certainly an outsider. He grew up in a dirt-poor Kansas family with six siblings and by age 13 began taking on piecework in local auto shops to help his mother pay the bills. He particularly enjoyed jamming oversized engines into places no one believed they'd fit. He put truck engines inside Camaros, Grand Nationals, and Super Bees; he even put a methanol-fueled turbocharger on a tiny Yamaha Banshee four-wheeler. "We took that thing from 35 horsepower to 208," he recalls. "It was crazy. We couldn't put enough fins on the back to keep it on the ground." After dropping out of school in the seventh grade, he made a living by buying up totaled cars and making them as good as new. "That," he says, "was my school."

Along the way, Goodwin also adopted two views common among Americans, but typically thought to be in conflict: a love of big cars and a concern about the environment. He is an avid, if somewhat nonideological, environmentalist. He believes global warming is a serious problem, that reliance on foreign oil is a mistake, and that butt-kicking fuel economy is just good for business. But Goodwin is also guiltlessly addicted to enormous, brawling rides, precisely the sort known to suck down Saudi gasoline. (I spied one lonely small sports car in the corner of his garage, but he confessed he has no plans to work on it right now.) When he picked me up from my hotel, he drove a four-door 2008 Cadillac Escalade XL that should have had its own tugboat. He parallel parked it in one try.

If Goodwin is an artist, though, his canvas has been the Hummer. His first impression of the thing was inauspicious. In 1990, he bought an H1 in Denver and began driving it back to Kansas. Within 50 miles, the bolts in the transmission shook loose, forcing him to stop to fix it. "By the time I made it home, after three roadside repairs, I pretty much knew that the Hummer was not all it should be," he told me. He didn't think much of the 200 horsepower engine, either, which did "zero to 60 in two days. It was a piece of junk."

So Goodwin decided to prove that environmentalism and power could go together--by making his new lemon into exhibit A. First, he pulled the gas engine so he could drop in a Duramax V8, GM's core diesel for large trucks. Diesel technology is crucial to all of Goodwin's innovations because it offers several advantages over traditional gasoline engines. Pound for pound, diesel offers more power and torque; it's also inherently more efficient, offering up to 40% better mileage and 20% lower emissions in engines of comparable size. What's more, many diesel engines can easily accept a wide range of biodiesel--from the high-quality stuff produced at refineries to the melted chicken grease siphoned off from the local KFC.

"Think about it," Goodwin laughs. "A 5,000-pound vehicle that gets 60 miles to the gallon and will do zero to 60 in five seconds!"

Putting a diesel engine in the Hummer, however, required Goodwin to crack GM's antitheft system, which makes it a pain to swap out the engine. In that system, the engine communicates electronically with the body, fuel supply, and ignition; if you don't have all the original components, the car won't start. Goodwin jerry-rigged a set of cables to trick the engine into believing the starter system had broken, sending it into "fail-safe mode"--a backdoor mechanism installed at the factory. (At one point in his story, Goodwin wanders over to a battered cardboard box in the corner of the garage and hauls out an octopuslike tangle of wires--"the MacGyver," his hacking device. "I could have sold this for a lot of money on eBay," he chuckles.)

Once he'd picked the car's lock, Goodwin installed the Duramax and a five-speed Allison--the required transmission for a Duramax, which also helps give it race-car-like control and a rapid take off. After five days' worth of work, the Hummer was getting about 18 mpg--double the factory 9 mpg--and twice the original horsepower. He drove it over to a local restaurant and mooched some discarded oil from its deep fryer, strained the oil through a pair of jeans, and poured it into the engine. It ran perfectly.

But Goodwin wanted more. While researching alternative fuels, he learned about the work of Uli Kruger, a German who has spent decades in Australia exploring techniques for blending fuels that normally don't mix. One of Kruger's systems induces hydrogen into the air intake of a diesel engine, producing a cascade of emissions-reducing and mileage-boosting effects. The hydrogen, ignited by the diesel combustion, burns extremely clean, producing only water as a by-product. It also displaces up to 50% of the diesel needed to fuel the car, effectively doubling the diesel's mileage and cutting emissions by at least half. Better yet, the water produced from the hydrogen combustion cools down the engine, so the diesel combustion generates fewer particulates--and thus fewer nitrogen-oxide emissions.

"You can feed it hydrogen, diesel, biodiesel, corn oil--pretty much anything but water."

"It's really a fantastic chain reaction, all these good things happening at once," Kruger tells me. He has also successfully introduced natural gas--a ubiquitous and generally cheap fuel--into a diesel-burning engine, which likewise doubles the mileage while slashing emissions. In another system, he uses heat from the diesel engine to vaporize ethanol to the point where it can be injected into the diesel combustion chambers as a booster, with similar emissions-cutting effects.

Goodwin began building on Kruger's model. In 2005, he set to work adapting his own H1 Hummer to burn a combination of hydrogen and biodiesel. He installed a Duramax in the Hummer and plopped a carbon-fiber tank of supercompressed hydrogen into the bed. The results were impressive: A single tank of hydrogen lasted for 700 miles and cut the diesel consumption in half. It also doubled the horsepower. "It reduces your carbon footprint by a huge, huge amount, but you still get all the power of the Duramax," he says, slapping the H1 on the quarter panel. "And you can feed it hydrogen, diesel, biodiesel, corn oil--pretty much anything but water."

Two years ago, Goodwin got a rare chance to show off his tricks to some of the car industry's most prominent engineers. He tells me the story: He was driving a converted H2 to the SEMA show, the nation's biggest annual specialty automotive confab, and stopped en route at a Denver hotel. When he woke up in the morning, there were 20 people standing around his Hummer. Did I run over somebody? he wondered. As it turned out, they were engineers for GM, the Hummer's manufacturer. They noticed that Goodwin's H2 looked modified. "Does it have a diesel engine in it?"

"Yeah," he said.

"No way," they replied.

He opened the hood, "and they're just all in and out and around the valves and checking it out," he says. They asked to hear it run, sending a stab of fear through Goodwin. He'd filled it up with grease from a Chinese restaurant the day before and was worried that the cold morning might have solidified the fuel. But it started up on the first try and ran so quietly that at first they didn't believe it was really on. "When you start a diesel engine up on vegetable oil," Goodwin says, "you turn the key, and you hear nothing. Because of the lubricating power of the oil, it's just so smooth. Whisper quiet. And they're like, 'Is it running? Yeah, you can hear the fan going.'"

One engineer turned and said, "GM said this wouldn't work."

"Well," Goodwin replied, "here it is."

Goodwin's feats of engineering have become gradually more visible over the past year. Last summer, Imperium Renewables contacted MTV's show Pimp My Ride about creating an Earth Day special in which Goodwin would convert a muscle car to run on biodiesel. The show chose a '65 Chevy Impala, and when the conversion was done, he'd doubled its mileage to 25 mpg and increased its pull from 250 to 800 horsepower. As a stunt, MTV drag-raced the Impala against a Lamborghini on California's Pomona Raceway. "The Impala blew the Lamborghini away," says Kevin Kluemper, the lead calibration engineer for GM's Allison transmission unit, who'd flown down to help with the conversion. Schwarzenegger, who was on the set that day, asked Goodwin on the spot to convert his Wagoneer to biodiesel.

Observers of Goodwin's work say his skill lies in an uncanny ability to visualize a mechanical system in precise detail, long before he picks up a wrench. (Goodwin says he does much of his mental work during long drives.) "He has talent unknown to any mortal," says Mad Mike, Pimp My Ride's host. "He has this ability to see things so exactly, and I still don't know how he does it."

For his part, Goodwin argues he's merely "a problem solver. Most people try to make things more complicated than they are." He speaks of the major carmakers with a sort of mild disdain: If he can piece together cleaner vehicles out of existing GM parts and a bit of hot-rod elbow grease, why can't they bake that kind of ingenuity into their production lines? Prod him enough on the subject and his mellowness peels away, revealing a guy fired by an almost manic frustration. "Everybody should be driving a plug-in vehicle right now," he complains, in one of his laconic engineering lectures, as we wander through the blistering Kansas heat to a nearby Mexican restaurant. "I can go next door to Ace Hardware and buy a DC electric motor, go out to my four-wheel-drive truck, remove the transmission and engine, bolt the electric motor onto the back of the transfer case, put a series of lead-acid batteries up to 240 volts in the back of the bed, and we're good to go. I guarantee you I could drive all around town and do whatever I need, go home at night, and hook up a couple of battery chargers, plug one into an outlet, and be good to go the next day.

"Detroit could do all this stuff overnight if it wanted to," he adds.

In reality, Goodwin's work has begun to influence some of Detroit's top auto designers, but through curious and circuitous routes. In 2005, Tom Holm, the founder of EcoTrek, a nonprofit that promotes the use of alternative fuels, heard about Goodwin through the Hummer-junkie grapevine and hired him. When Holm showed GM the vehicles Goodwin converted, the company was duly impressed. Internally, Hummer executives had long been looking for a way to blunt criticism of the H2's gas-guzzling tendencies and saw Goodwin's vehicles as an object lesson in what was possible. So GM decided to flip the switch: It announced the same year that, beginning in 2008, it would convert its gasoline Hummers to run on ethanol; by 2010, it said, Hummers would be biodiesel-compatible.

"It was an influence," concedes Hummer general manager Martin Walsh, of the EcoTrek vehicles. "We wanted to be environmentally responsible by having engines in Hummers that run on renewable fuels." But until I contacted Hummer for this story, GM didn't know that the man behind those machines was none other than Goodwin.

GM's commitment is a start, however halting. Overall, though, Detroit still seems to be all but paralyzed by the challenges of fuel economy, emissions, and alternative fuels. And it's not just about greed or laziness: Talk to car-industry experts, and they'll point out a number of serious barriers to introducing radically new alternative-fuel vehicles on a scale that will make a difference. One of the highest is that low-emission fuels--biodiesel, ethanol, electricity, hydrogen, all of which account for less than 3% of the nation's fuel supply--just aren't widely available on American highways. This creates a chicken-and-egg problem. People won't buy alternative-fuel cars until it's easy to fill them up, but alternative fuel makers won't ramp up production until there's a viable market.

Goodwin admits all these things are true but believes the country could be weaned off gasoline in a three-step process. The first would be for Detroit to aggressively roll out diesel engines, much as Europe has already begun to do (some 50% of all European cars run diesel). In a single stroke, that would improve the nation's mileage by as much as 40%, and, because diesel fuel is already widely available, drivers could take that step with a minimum of disruption. What's more, given that many diesel engines can also run homegrown biodiesel, a mass conversion to diesel would help kick-start that market. (This could have geopolitical implications as well as environmental and economic ones: The Department of Transportation estimated in 2004 that if we converted merely one-third of America's passenger cars and light trucks to diesel, we'd reduce our oil consumption by up to 1.4 million barrels of oil per day--precisely the amount we import from Saudi Arabia.)

The second step in Goodwin's scheme would be to produce diesel-electric hybrid cars. This would double the mileage on even the biggest diesel vehicles. The third phase would be to produce electric hybrids that run in "dual fuel" mode, burning biodiesel along with hydrogen, ethanol, natural gas, or propane. This is the concept Goodwin is proving out in his turbine-enhanced H3 Hummer and in Neil Young's Lincoln: "At that point, your mileage just goes really, really high, and your emissions are incredibly low," he says. Since those vehicles can run on regular diesel or biodiesel--and without any alternative fuel at all, if need be--drivers wouldn't have to worry about getting stranded on the interstate. At the same time, as more and more dual-fuel cars hit the road, they would goose demand for genuinely national ethanol, hydrogen, and biodiesel grids.

For Goodwin, navigating this process is all about imagination and adaptability. "The point is to design cars that are flexible," he says. "You'll see a change in how vehicles are fueled in the future. Which fuel source will be the exclusive one or the one that'll take over the petroleum base is, you know, anybody's guess, so it's like the wild, wild West of fuel technology right now. I think it'll be a combination between a few different fuels. I know hydrogen will definitely come around."

Imagination and vision, of course, are often rewarded. As global pressure increases on the United States to reduce our carbon emissions, those rewards are likely to get juicier. Under some versions of legislation being considered in Congress, for example, companies voluntarily deploying superefficient vehicles in large fleets could be awarded substantial offsets. Take DHL, the FedEx rival: Goodwin says his company, SAE Energy, is negotiating with the shipper to convert 800 of its vehicles to dual fuel. "We could get them an offset of something like 70 cents a gallon," Goodwin says, "and reduce their cost of fuel by 50%."

Industry insiders and observers agree with many of Goodwin's prescriptions, particularly his concept of fuel flexibility. "We have to have alternatives," says Beau Boeckmann, vice president of California's Galpin Motors, the largest Ford dealership in the country, who recently partnered with Goodwin to convert a 2008 F450 truck to hydrogen and biodiesel. "Only with a combination of things can we get alternative fuels off the ground." Boeckmann believes hydrogen is the true "silver bullet" for ending greenhouse gases but thinks it'll take more than a decade to figure out how to create and distribute it cheaply. Mary Beth Stanek, GM's director of environment, energy, and safety policy, also agrees with the multifuel approach--and points out that this is precisely how Brazil weaned itself from regular gasoline. "They pull up to the pump, and they've got a whole bunch of different choices," she notes. She, too, predicts diesel will make a comeback because of its inherent fuel efficiency: "You will see more vehicles going back to diesel over a lot of different lines."

Yet in reality, American carmakers seem conspicuously slow on the uptake. Stanek is about as ardent a fan of alternative fuels as you're likely to find inside GM, but even she admits no one there is seriously thinking of abandoning the gasoline engine anytime soon. The 300-million-gallon U.S. biodiesel business is a fraction of the 12-billion-gallon ethanol one. And Detroit is extremely cautious about what the market can bear.

A Detroit carmaker does, of course, have to worry about selling millions of cars at reasonable prices. But we've been hearing this refrain for a long, long time. And with European and Japanese carmakers driving ever harder into our market--and with Chrysler having become just another meal for Cerberus Capital--this hardly seems like the time to be overly cautious. (Those ultralow-emission Mercedes BlueTec diesels, for example, include a four-wheel-drive sedan that gets 37 mpg and goes from zero to 60 in 6.6 seconds.) Moreover, after decades of consumer apathy, improving fuel economy and reducing carbon output are becoming urgent national priorities. The green groundswell has arrived, and, given the stakes, anyone who ignores it does so at his peril. If Detroit can't sell diesel now--especially a clean, high-performance, money-saving diesel--it never will.

With U.S. carmakers being stripped for parts, now is hardly the time for them to play it safe.

Goodwin, perhaps, can afford to be a visionary. He has the luxury of converting cars for fancy clients who'll pay handsomely to drive on higher moral ground. (He charges $28,000 for a "basic H2 conversion to diesel--custom concept cars cost far more.") The future of the American car will likely be won by an automaker that can split the difference--one that may innovate more slowly than Goodwin would like, but a hell of a lot faster than the Big Three.

Goodwin himself seems more oracle than implementer, slightly unsure of how his ideas could be brought to the masses. He's working on patenting aspects of his and Kruger's dual-fuel work and would love to license it to the big carmakers. But the truth is, he's a mechanic's mechanic--happiest when he's solving some technical puzzle. He loves getting his hands dirty, "throwing wrenches around" in his shop, pioneering some weird new way to fuel a car. Today, he's thinking about taking his wife's Infiniti, outfitting it with a tank of ether, and powering the engine via blasts of compressed air in the cylinders. "Zero emissions!" he crows. It's the visionary inventor's curse: constantly distracted by shiny objects.

Goodwin eyes the turbine, which he has dragged out to the center of the floor. Just for kicks, he says, he's thinking of mounting it on a wheelie board and firing it up. "I'd love to see how fast that goes," he says. "I'm just not sure how I'm going to steer it."