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Wealth Daily's Weekend Edition

Written By Brian Hicks

Posted October 4, 2009

Welcome to the Wealth Daily Weekend Edition — our insights from the week in investing and links to our most-read Wealth Daily and sister publication articles.

It was this time last year that all hell broke lose. . .

Traders ran screaming — eyes shut, ears covered — toward the exits, as the Dow would lose 800 points in a single day and $1.2 trillion of shareholder value.

And it was all thanks to the House, which shot down the first version of The Emergency Economic Stabilization Act of 2008 — or as we like to call it, Paulson’s Blank Check Request.

While the House would eventually pass the package aimed at cleaning up toxic assets, have we really recovered lost ground or done anything to clean up the banks or future CDO or mortgage-backed disasters? Has the bad news gone away?

It all depends on who you ask. . .

One thing’s for certain: We’re almost right back to where we started, as the bulls and bears put up quite a fight. And they’re far from done.

Heck, we even have perma-bears turning bullish.

But don’t count the bears out just yet.

More in just a moment. . .

For now, in case you’ve missed any of the recent top stories from Wealth Daily and our companion publications, we’ve included them below.

The Housing Market Bottom: Sorry Charlie, But Housing has Further to Fall
Wealth Daily Editor Steve Christ takes a look at the Case-Shiller Home Price Index and explains why the housing bottom is more elusive than the bulls think.

Water Infrastructure Stocks: Using the "Philly Plan" for Profit
Green Chip Editor Nick Hodge discusses water infrastructure stocks through the lens of a recently announced $1.6 billion project. . .

Investing in Geothermal Energy: Cashing in on Nevada’s Geothermal Jackpot
Energy & Capital Editor Nick Hodge discusses investing in geothermal energy, with special attention paid to Nevada…

Frontier Markets ETF: Double the Wall Street Rally with this Global Fund
Editor Sam Hopkins takes a look at the best way to invest in frontier market ETFs where few Wall Street pundits would even think to look.

The Most Profitable Physical Gold Investment We’ve Ever Seen: There’s No Rush like a Gold Rush
There’s a brand new investment vehicle that allows you to DOUBLE your profits from gold. . . and with gold prices expected to skyrocket as high as $5,000 an ounce, this could be the safest and most profitable investment of a lifetime.

Jim Grant on the U.S. Economy: Has the Perma Bear Turned Bullish?
Wealth Daily Editor Brian Hicks comments on the recent opinions of Jim Grant regarding a coming economic recovery.

The Next "Obama-nopoly": What Will Happen If the Gov’t Takes Over Student Loans
While everyone’s focused on health care, Uncle Sam is quietly seizing an industry worth $56 billion per year. . . and you can close 229% if you get in ahead of the takeover.



What we have this week is a mixed bag of bullishness and bearishness in a market with more ups and downs.

According to the government, GDP is on the up and up. . . Our economy contracted by only 0.7% in the second quarter. That’s down from previous 1% projections and could seal the deal for a positive GDP read when we get Uncle Sam’s Q3 read in late October.

Personal spending jumped 1.3% in August — its biggest rise in about 8 years — as American incomes shot up just 0.2%. Consumers also spent $129 billion more in August, and saved $112 billion less. Savings as a percentage of income now stands at 3% from 4%.

Pending home sales were up 6.4% in August, according to the Association of Realtors. However, says NAR chief economist Lawrence Yun, "Deals are not necessarily closing because of long delays related to short sales, and issues regarding complex new appraisal rules. No doubt many first-time buyers are rushing to beat the deadline for the $8,000 tax credit, which expires at the end of next month. . . All we can say for certain is sales will decline when the tax credit expires because we are not yet on a self-sustaining recovery path. It also raises a risk of a double-dip recession."

A double-dip recession, huh? Where have I heard that before?

Also making headlines: the FDIC is Broke. . . Watch your Wallets

Sheila Bair announced this week that the deposit insurance fund, or the money that protects our savings accounts, will run at a deficit for the first time since 1991. But that’s what happens when more than 100 bank failures strip the fund of $52 billion.

To fix the situation, Bair has proposed that the FDIC force banks to prepay insurance funds through 2013, which would raise $45 billion for the FDIC. The government arm could also borrow a $500 billion line of credit from the Treasury.

But borrowing money from the taxpayers should only be a last ditch effort for the unseen problems. The fact that the agency would even consider this option now shows just how bad the FDIC financial condition has become.

Whichever path it chooses, remember this: The FDIC has been run like garbage and its credibility has been riddled with failures. If the agency were run properly, Bair, it wouldn’t be in this shape.

Consumer confidence numbers were worse than expected.

Is this really a surprise?

Consumer confidence fell to 53.1 in September from August’s upwardly revised 54.5. Economists expected a read of 57.

But how can you have growth with rising unemployment and ridiculous debt facing the economy?
You can’t. Consumers are only going to get excited when their job security isn’t an issue.

Unemployment may have slowed a bit, but it’s likely to pass 10% this year. And to be honest, that number is closer to 16%, once you take into consideration workers who dropped off grid because they’re no longer on unemployment benefits.

Would you believe the unemployment rate for young Americans has popped to 52.2% — a post-World War II high?

No wonder confidence is down.

And as long as consumers aren’t confident, retailers, lenders (such as student loan lenders), and the like will suffer.

And it’s not as if housing is improving. . .

Not only is the housing disaster far from over, there’s a strong possibility we haven’t see the worst. Remember this chart in an article I wrote this past July about Option ARMs?

This loan idea was simple enough: pay interest on the principal for a set period of time and wait until the housing market appreciated in value. By the time the interest-only period expired, the owner could sell for a profit or simply refinance. But with many of these homes well under water — worth much less than the loans against them — many homeowners will find their mortgages unaffordable.

Monthly payments can jump by as much as 75%:

  • There are 2.8 million interest-only mortgages, worth a combined $908 billion.

  • Over the next 12 months, $71 billion of them will expire, forcing borrowers to pay much bigger monthly installments toward the value of the principal.

  • $100 billion more will reset the year after that.

  • By mid-year 2011, another $400 billion will follow suit.

But there’s always a bull out there saying every thing’s okay. And there’s always a bull market somewhere. . .
In fact, we may be witnessing continued momentum in for-profit education stocks, like Apollo (APOL) on a recent IPO.

Good Investing,

Ian L. Cooper

Wealth Daily

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