• Another all-time high for oil… why the latest is the greatest of them all
• Dollar falls again… Chuck Butler on “the only thing” that could rescue the ailing greenback
• More pain to come for financials… two industry insiders say one mega-bank is on verge of disaster
• Your latest subprime vocab lesson: What are “pay option loans” and how they might wreck Wall Street
• Gold at new record high… Kevin Kerr with two reasons it’s still worth buying
• Plus, water wars in the U.S… government sends Army to Georgia
  

We begin today with another benchmark for your kitchen calendar: March 3, 2008 — most expensive oil price in the history of human civilization.

Light, sweet crude briefly touched $103.95 yesterday… its first inflation-adjusted historical high since 1980.

Courtesy of The New York Times:

 

In dollars, the 1980 high was just below $40 a barrel. But as you can see, $40 ain’t what it used to be.

“In 2007, the United States imported $331 billion worth of crude oil,” comments our oilman Byron King, citing a Department of Energy report, “at an average price of $64.25 per barrel. If the U.S. imports crude oil in 2008 at an average price of about $95 per barrel, the annual import bill could jump by about $150 billion or more, to $580-600 billion.

“That would be larger than the entire budget for the Department of Defense.

“This hemorrhage of currency will, of course, negate any effect of the Bush-Congress economic stimulus package, of about $152 billion value.”

Who could have seen that coming?

In kind, the dollar bled all day yesterday and into this morning. The dollar index dribbled down to a new all-time low of 73.3. The yen is still having its way with greenbacks… the Nipponese currency climbed on top, to 102, during the night. The euro watched and enjoyed its way further up, to $1.52.

“I think the only thing the dollar has going for it these days,” says EverBank’s Chuck Butler, “is the hope that the European Central Bank tries to play catch-up with the Fed regarding rate cuts. I don’t think the ECB will do that. But it will, most likely, cut rates this spring… probably in May. So… When that happens, it just might be a buying opportunity.”

“The dollar’s going to get weaker over time,” Warren Buffett told reporters yesterday, following the release of the Berkshire shareholders letter. “The government can talk about how it’s in our interest to have a strong dollar, but we’re not following policies that lead to that. [A weak dollar] is just a consequence [of government policy], and it’ll just continue to be.

“If you do the same thing over and over again, you’re going to get the same result… and we are doing the same thing now that we were doing two, three, five years ago, and the dollar will weaken in an irregular basis, in my view, for some time to come.”

Amen.

The stock market swooned on petty rumors yesterday.

Out of the gate, the ISM manufacturing data we discussed tripped markets up and down. They went a full 1%. But then whispers of another “secret, closed-door Fed meeting” drove markets wild. Up they rallied… but then… it turns out the meeting was actually just the same old boring regularly scheduled drivel fest the Fed usually conducts.

“Nothing out of the ordinary,” said Fed spokespeople.

A fickle bunch, floor traders smirked. After they’d slithered off for the day, the Dow and S&P 500 ended right where they started, and the Nasdaq fell 0.6%.

It’s going to take “a lot more money” to rescue Citigroup and U.S. banks, suggested Sameer al-Ansari today, CEO of Dubai International Capital.

The head of the UAE sovereign wealth fund was referring to the $23 billion in capital injections Citi has already received from SWFs in Dubai, Kuwait and Singapore. How much is “a lot more”? We think you’ll find out soon, and so will Merrill Lynch:

Citigroup will post another loss in its first quarter, analysts from Merrill Lynch predicted this morning, and take more “big write–downs.” Merrill has slashed its earnings estimate for Citi to a loss of $1.66 per share this quarter.

Citi shares plummeted to a nine-year low on the warning. If this keeps up, it might soon be a good time to buy. But not yet.

2007 brought you terms like “ARM,” “CDO” and “SIV”… here’s one for 2008: pay option loan (POL).

The pay option loan is a variation on the ARM in which the borrower can choose how much they can pay toward their mortgage each month. The loans allow you as the borrower to pay less each month if the going gets tough. Fair enough.

Trouble is, if you pay the minimum enough times, you’ll come up short of the interest owed, the remainder of which gets added to your principal. Enough of that… and you’ve got a noticeably larger mortgage than you first signed up for… with the adjustable rates about to kick in. Fun, eh?

Yeah.

Our friends at Countrywide filed an SEC report on Friday admitting they hold $29 billion worth of POLs… $26 billion of which have already grown beyond the amount of the original loan. More than eight out of 10 of these loans were made to borrowers who provided little to no income documentation. As of December, seven out of 10 of them were electing to pay less than interest-only payments.

Good grief… three guesses as to what happens next.

The Canadian government reported this morning that its economy grew less than a percent in the fourth quarter… which was a shock to some, given the commodities boom and the soaring Canadian dollar. For the year, the economy grew an anemic 2.7%.

The loonie lost parity on the news, down to 98 cents against the dollar this morning.

On cue, The Royal Bank of Canada posted the worst Canadian write-down since the start of the subprime banking massacre yesterday… a whopping C$187 million.

Not to make light of a couple hundred million bucks, but c’mon. If that’s as bad as it gets up there, you’ll never shake your moniker: United States Lite. Let’s get with it, eh?

Gold spiked to another new record high yesterday, this time to $989. Not coincidentally, the precious metal peaked the very moment the dollar index attained its latest record low. Also, as with the dollar, gold backed off its latest record this morning, and trades for about $983.

“If you’re worried about the U.S. economy,” says Kevin Kerr, “buy gold. If you’re not worried about the Chinese economy, buy some more gold.

“Gold demand in China relative to GDP is about five times higher than in the U.S. Also, for several years, Yu Yongding, a committee member of the People’s Bank of China, has advised that China use its foreign currency reserves — the largest in the world — to buy gold. He’s not the only one. Other Chinese economists are urging their government to QUADRUPLE the nation’s gold reserves.”

As we’ve noted here in The 5, China reports that less than 1% of its $600 billion in reserves are held in gold. Should the country move even a fraction of the trillion-plus in dollar reserves it has into gold, you could see a spike of historical proportions.

The CRB Spot Index, the historic global benchmark for commodities, jumped 12% in February – its highest leap since July 1974, when “stagflation” was making its debut as a buzzword for wonks. What’s more, the index is up 15% already in 2008 — its best two-month opener since Eisenhower was working on the Interstate Highway System 52 years ago.

“The American economy is definitely slowing,” comments Chris Mayer to his Special Situations readers. “Whether it is or isn’t actually contracting is a matter of debate. Just looking at how companies are doing, it’s not hard to see that North American operations are off. Overseas, though, it’s a different story. Companies with operations in China or India report that business is good. The booming CRB index is proof of that.

“So it’s an interesting market for investors here in the U.S. Sometimes, it’s like picking over a minefield, because the price swings seem so great. But it’s that volatility that creates room for the stock picker to operate.”

Mr. Mayer’s new release, Invest Like a Dealmaker, is topping the charts this morning… No. 1 on both Barnes & Noble’s and Amazon’s business lists. If you’re inclined to read books, there is no easier way to get insights from the finest value investors of our time.

You may recall we’ve mentioned the water war brewing in the Southern U.S.. For the past two years, the Georgian government has been “illegally” damning up extra water to support a booming Atlanta population — water that would otherwise have flowed to cities in Florida and Alabama.

The Army Corps of Engineers announced this morning they failed to broker a negotiation between Georgia, Alabama and Florida. Now Army engineers will employ a water-rationing plan handed down by the federal government. We predict this will get a whole lot more interesting before it rains.

“Based on my personal experience with friends,” writes a reader, “as long as we Americans have a dollar in our pocket — a single dollar — we will spend it. No matter how poor one’s financial condition, no matter how large one’s financial responsibilities/commitments loom, consumer spending will increase as long as there is a dollar left to spend. This is the pathetic truth. When that last dollar is spent — then and only then will consumer spending plummet.”

The 5 responds: The past two “recessions” prove consumers will go even further than that. They’ll spend the last dollar and any on loan from a credit card banks offering instant gratification near you.

“By the way, I rate your services a perfect 10 out of 10 — you guys are great!”

The 5 responds, again: Gracias. You flatter us.

“As Bob Dylan said, ‘When you ain’t got nothin’, you got nothin’ to lose…’” a reader reminded us after we witnessed two frame store clerks casually discussing the annihilation of the middle class.

“I think that woman showed great perception and insight with her comments. The impact of rising food and energy costs will utterly destroy the standard of living of many middle-class families, many of whom already can’t afford health insurance unless their employer provides it — an increasingly rare occurrence. A middle class will remain in name only, with a lifestyle similar to that of the lower middle class of the 1950s and 1960s that I grew up in — no home ownership, no vacations, almost no discretionary income, living paycheck to paycheck.”

The 5: This time around, however, Americans will be experiencing a first: the prospect of shrinking paychecks, rather than growing ones… and a diminishing return on those dollars comprised within.

Cheers,

Addison Wiggin,
The 5 Min. Forecast

P.S. Today is the birthday of the nation. The Constitution was ratified on March 4, 1789. For many years, it was also the day that new presidents were sworn in — that is, until rapid transportation made it possible for the electorate to oust the outgoing louse 43 days earlier.

It’s also your eldest editor’s birthday today. For a present, his wife scheduled a physical with a new physician. At his age, you know what’s included in the battery of tests… ahem. Thank you, ma’am, are we supposed to hug now?

• Global banks unite for another bailout “superfund” — who’s the target and how it’s moving markets
• More Shanghai shellacking… Mayer on opportunities still remaining despite a recent Chinese bear market
• Dollar flirts with all-time lows… Chuck Butler on the greenback’s next move
• Our Maniac Trader on silver’s sudden breakout… just the beginning or time to take profits?
• Plus, food inflation threatens global hunger relief funds… what a perfect time for a biofuel jumbo jet!

Oy, here we go again… A consortium of the world’s biggest banks is discussing the creation of another bailout superfund – this one for struggling bond insurer Ambac.

Citi, UBS, Wachovia and Royal Bank of Scotland are all rumored to be in talks with the New York State Insurance Department. The AP reported on Friday afternoon the banks may plan a bailout of Ambac and its belabored bond portfolio.

A Goldman Sachs analyst recently estimated that Ambac would need some $3.5 billion in capital just to maintain its AAA rating, and who knows how many billions more to cover all the assets it insures. Perhaps this new banking conglomerate superfund will be more attractive than the similar, but utterly useless $100 billion fund abandoned last year just before Christmas… we’re not holding our breath.

Still, Ambac shares shot up 16% Friday.

And on the news, the U.S. markets staged a surprise turnaround.

Benchmarks were in the dumps most of the day. The Dow and S&P were down over 1%. In fact, the Nasdaq fell as low as 1.5% intraday, re-entering an official bear market territory by falling 20% off its 2007 high.

But the Ambac news caused traders a bit of late-day euphoria. With 30 minutes left before the closing bell, the Dow and S&P 500 both rallied to positive territory. The Nasdaq dissed its bear, too, breaking even for the day.

For all of last week’s ups and downs, swings and throes… the market essentially went nowhere.

On the other side of the world, however, the story was a little more dramatic. The Shanghai Composite fell again by over 4% last night, even as markets all over the world rallied. The benchmark Chinese index is now at a seven-month low, 30% off its all-time high set in October:

Winter weather and drought have damaged some 23 million hectares of Chinese farmland.

A severe drought in northern China, coupled with abnormally frigid temps in south and east China, has scared a plot of land collectively the size of Idaho… one-sixth of China’s entire farmable landscape. Unless Mother Nature provides a quick turnaround, much of this land may not be usable for the 2008 growing year, and some may not recover for years… if at all.

Add this to last week’s reports of Chinese consumer prices spiking to 11-year highs of 7%, a massive recent global run-up of grain prices, a current bear market in Chinese stocks and the ever-looming “global economic slowdown.”

This could get interesting.

On the other hand, “The Chinese transportation industry is booming,” Chris Mayer tells us, finding opportunity in the midst of a growing number of Chinese crises.

“China now has the second longest highway network in the world, behind only the U.S. But it will add to that significantly over the next decade. Then there is the railway expansion. The Economist calls it ‘the biggest expansion of railway capacity undertaken by any country since the 19th century.’ Then there is air travel: From only 7 million air travelers as recently as 1985, China topped 185 million last year. Then there is sea container capacity: Over the next decade, China plans to expand this by 85%.

“And on and on it goes. That’s a lot of metal and concrete to consume. That’s a lot of fuel. All of that infrastructure supports a growing appetite — in the many senses of that word — of over a billion people. That’s just China. Add India to the mix. Add Russia.

“So you see, it’s not hard to imagine where the scarcity comes from. We need to produce a lot more of the basics, and we need to use what we have more efficiently. Those are powerful trends in the world today.

“For investors, then, the playbook seems obvious. Own what’s scarce. Own what helps alleviate that scarcity.”

Mr. Mayer’s latest Capital & Crisis recommendation owns just that… a budding petroleum refiner with an attractive, undervalued agricultural asset. Learn about it by subscribing, here.

In the U.S., gas prices have crept up again. They’re now just short of all-time highs.

The national average price at the pump rose to $3.11 over the weekend, a dime short of last May’s record high of $3.21 and 75 cents higher than this time last year. The U.S. Energy Department recently raised its forecast for spring gas prices up to $3.40. If you ask us, that’ll be a bargain by 2009.

The dollar index continued its recent fall over the weekend, sinking deeper into the 75 range and now less than one point from its all-time low. The euro dug deeper into $1.48, and the pound rebounded to $1.96. The Canadian dollar is little more than a whisper below parity, at 99.7 cents. The yen rallied too, back to 107.

“If you’re keeping score at home,” notes Chuck Butler, “that’s two consecutive down weeks for the dollar, after spending most of the early part of this year on the black side of the ledger. There were just so many pundits out there talking about a ‘dollar rebound’ in 2008 that the markets had to test the waters to see how it looked. And it just didn’t look very good! The fundamentals just aren’t there for a dollar rally in 2008.

“But hey! Stranger things have happened, eh?”

Gold’s price held steady all through the weekend, around $950, just off recent record highs.

To put that price in perspective, each Oscar statuette last night cost “the Academy” $100 more this year than it did in 2007, says Bloomberg. Gold has shot up 40% since the last Academy Awards, and according to Oscar spokespeople, each legendary trophy now costs a record $500. But even an enterprising Oscar winner won’t be able to profit from gold’s rise: By accepting an Academy Award, winners are required to never sell, trade or alter the Oscar before offering to sell it back to the Academy… for $1.

We met Alex Gibney, btw, the guy who won the Oscar for best documentary, when we were at Sundance a couple of weeks ago. He came to a party hosted by our agent. His current film is about the life of Hunter S. Thompson, but a couple of years ago he took us behind the scenes of the meltdown at Enron. Nice chap, if a little intense.

The silver spot price busted through $18 this morning, setting mulitdecade highs and continuing an impressive recent run. Year to date, the metal is up 22%.

“Silver has moved up to its new highs on several factors.” says our resource man Kevin Kerr. “Fear of inflation, the drop in output in South Africa and prospects of U.S. rate cuts are all helping to lift gold too.

“The market is supposedly now anticipating another 50 point cut by the Fed. Meanwhile, inflation is surging at every turn. While gold positions itself for a run at $1,000, silver is just catching up and is probably fairly valued at around $19 per ounce.

“Strong global demand for both retail and industrial uses is supporting a strong silver price and will continue to for some time to come; however, at these levels, for those of us who have been long since 12 and 13 bucks … well, $17 and over offer very nice profits, and in my opinion, it’s a good time to cash out and then observe.”

You can ride along with our Maniac Trader, here.

Richard Branson flew the first biofuel-powered commercial jet across Europe over the weekend. Virgin Atlantic flew a 747 from London to Amsterdam using a fuel supposedly derived from Brazilian nuts and coconuts. The bizarre tropical cocktail made up 20% of the plane’s fuel for a flight Branson labeled a “vital breakthrough.”

Branson getting high on biofuel

Virgin officials maintain that none of the fuel’s bio-ingredients will compete with staple food sources… that is, until every Brazilian farmer slaughters his cattle and burns down his sugar cane field to plant coconut trees to sell to Sir Richard.

Meanwhile, the World Food Program, the United Nation’s agency that aims to alleviate world hunger, will most likely halt aid to several locales because of rising food prices.

“Our ability to reach people is going down just as the needs go up,” said WFP exec Josette Sheeran. She told the FT over the weekend that the WFP’s budget was rising by millions each week, thanks entirely to rising food costs.

“We are seeing a new face of hunger in which people are being priced out of the food market… Situations that were previously not urgent — they are now,” she continued, specifically citing Indonesia, Yemen and Mexico. Barring a sudden wave of short-term donations, the WFP will be forced to consider “cutting the food rations or even the number or people reached.”

Hmmmn…

“OPEC is taking political/economic advantage of a geological imperative,” writes a reader in response to OPEC’s recent threat to cut production. “It has to cut production because its enhancement techniques are beginning to lose the ability to keep up.

“After 30 years in oil field servicing, I have worked most of the fields — 12 in the Gulf — and know when fields enter decline. From what I have seen, there are none left there that have capacity to economically increase production — even at $100 per barrel. Beyond $150, there is some untapped reserve that could be produced with expensive tertiary enhancement, but even that would not significantly increase exports.

“It is time to realize that the peak has passed and that while there will be oil coming out of the ground for many years to come, it cannot possibly sustain the consumption levels that continue to be ignored by economists and politicians.”

The 5 responds: Peak sustainability — not just in oil fields, but in resources, water, food, etc. — is in some ways a more interesting challenge for the global economy than the debt and demographic picture that we’ve been obsessing over for the past decade.

In an effort to gain some perspective, this summer, we’re convening an entire conference on the subject at the Vancouver Fairmont from July 21-25. We’ve invited economists, traders, politicians, presidential candidates, authors, entrepreneurs, “diggers and drillers” and analysts of all stripes to come to share their views on building wealth and security during this “time of risk and scarcity.”

If you’re not already signed up for A View From the Peak and you know you’d like to attend, call Barb Pariello at 1-800 926-6575. If you’re not sure, we’ll follow up in a week with more specific details.

“I just forwarded Friday’s letter to six people,” a reader tells us, “among them a Ph.D. in economics, a Ph.D. in business, a former director of engineering at a major auto OEM and a manufacturing expert who heads up the Manufacturing Innovation Technology for Industry (MITI) and the National Association for the Collaborative Development of Manufacturing Sciences (NCMS). Needless to say, all are worried about the decline in America’s manufacturing base and lack of competitiveness, particularly in the automotive industry.

“First and foremost, manufacturing is critical to national defense. Second, we’ve been transferring the product value chain overseas, and in doing so, building up the economies of other nations at our own expense. Unless we reverse this decline quickly with a national manufacturing policy that keeps value — and jobs — in this country, America will become a third-world nation that prints worthless currency as its core product and seeks succor from the powerbrokers in China, India and the Middle East, where much of our debt increasingly resides.”

Cheers,

Addison Wiggin
The 5 Min. Forecast

• Surprising data: U.S. debt still has takers… is our democracy doomed?
• Russian SWFs get OK to invest in America… but only in the two worst stocks on the market
• Analyst that predicated the January financials plunge calls for 15-50% more losses
• How a Philadelphia survey might herald an entire U.S. manufacturing decline
• U.S. markets fall again… an atypical chart shows the Dow deep into an 8-year bear market

Here’s some interesting news. The Chinese bought more U.S. debt in December than they sold… the first time they’ve done so since before the credit crisis began last July.

Mainland China upped its stake in American debt during the month by nearly $20 billion, to $405 billion. Thus, surprisingly, China has brought U.S. Treasury holdings back to pre-credit crisis levels.

Also interesting, Brazil more than doubled its stake in U.S. debt last year, from $53 billion to $126 billion.

As we hasten to note nearly every time this data is released, the number of Treasury notes owned by foreign governments is breathtaking. Even though Japan has been a net seller for the last six months, Japan, China, the U.K. and Brazil own over $1.4 trillion in U.S. Treasuries themselves.

“Can democracy survive when its financial roots have been cut?” asked the economist James Galbraith back in 2006. “The American citizenry has lost its pride of place as creditor of the American state. The proportion of U.S. debt owned directly by Americans has fallen to below 10%; in 1945 (when the debt was more than twice as large in relation to GDP as now), citizen-creditors just about held it all.”

Combined, financial institutions and foreign nations now own over 70% of U.S. debt.

“The scale of public debt is not the issue,” contends Galbraith, “but its ownership is. Can a country — whether the United States or any other — be truly democratic if it is in hock to banks and foreigners?”

“We no longer ‘owe it to ourselves,’ as FDR used to say,” opines our Byron King. “The banks and overseas creditors have hijacked the bond process. The citizens have little direct stake in the U.S. government, certainly not as bondholders. And more than half of all citizens pay no taxes at all. Over 50% of all taxes are paid by the wealthiest 3% of households; 90% of all taxes are paid by the wealthiest 10%.

“I guess the amounts of money were just too large for the citizenry to continue to buy bonds and keep a financial stake in the health of the government. So with no financial stake in their own government, it’s all about ‘I get mine.’ From pork at the congressional level to ‘what benefits can I get?’ at the personal. Heck, everyone wants their check from the government. Hey, where’s mine?

“We’re doomed.”

The Russian government has given two sovereign wealth funds worth $157 billion the green light to begin buying bonds of foreign government agencies. The Russian Finance Ministry told its SWFs yesterday that 15% of their funds can now be used to buy the debt of 15 different international government-backed companies.

Most interesting to us, the Russian funds will now be allowed to buy debt of two U.S. companies — Freddie Mac and Fannie Mae. Oy… we hope they know what they’re getting into.

The other 85% will be used to purchase sovereign debt.

Meredith Whitney, the Oppenheimer analyst who outed Citigroup back in November, has issued another sell signal for banks yesterday.

A day after Whitney’s November warning, Citigroup stock fell 7% and the Dow shed 2.6%. Soon after, Citi cut its dividend by 41%, and has lost about 30% of its “value.” At the time, Whitney’s alert was rewarded with death threats from investors in the stock.

If you’re a Citi shareholder, grab your latex gloves and start cutting out letters from the newspaper. There’s more pain to come: “The best-case downside scenario,” Whitney told CNBC, “is that there is a 15% downside in the financials; worst case is 50%.” Whitney also speculated that Citi will soon need to cut its dividend again and raise much more capital to cover write-downs.

Bond insurer MBIA withdrew from its industry trade group — the Association of Financial Guaranty Insurers — yesterday. Ironically, MBIA chieftains claim that the industry must begin separating the business of insuring muni bonds from insuring riskier assets like CDOs and asset-backed securities.

“It is up to us to shape our future,” said newly crowned MBIA CEO Jay Brown, “in a way that we believe is most responsive to the markets, our policyholders and our owners, and we must do so without the constraints of participation in an industry association that does not always share our views.”

Food prices will rise 3-4% in 2008, predicted the U.S. Department of Agriculture’s chief economist Joseph Glauber yesterday. Should his prediction come true, that would spell a whopping 8% inflation rate for food since January 2007.

“While the ethanol boom can be expected to bring higher incomes to farmers and reduce government outlays for farm programs,” Glauber suggested at the USDA annual outlook conference, “it will also contribute to higher crop and livestock prices… Overall retail food prices for 2008-2010 are expected to rise faster than the general inflation rate.”

“There’s going to be real food inflation in this country,” added C. Larry Pope, CEO of Smithfield Foods. “I think we need to tell the American consumer that things are going up. We’re seeing cost increases that we’ve never seen in our business.”

Ahh… Inflation, the hidden tax, continuing in a grocery store near you.

The Philadelphia Fed’s Manufacturing Index fell to minus 24 from minus 20 in January. Often seen as a precursor to the ISM’s manufacturing index — which we’ll see on March 3 — the Philly Fed’s index now lies at lows unseen since post-tech bust 2001.

In fact, the Fed division’s measurement of “six-month outlook” fell to minus 16.9. That’s the first negative reading since 2001 and the lowest since 1990. Traders have baked in a ISM report early next month… perhaps you should, too.

The dollar took that news on the chin… again. As the dollar index fell back to 75, the euro rose well into $1.48, about a cent short of its all-time high set in November. The pound and loonie recovered too, back up as high as $1.96 and 99 cents, respectively. The yen found its way back to 107.

Gold struck yet another record high yesterday, of $953 per ounce. The once and future money has gained over $40 this week alone. Since striking its new high, we note that the gold price has stayed in a tight rage between $945-950 in Asian and European trading overnight.

The stock market in the U.S. lost about 1.2% in yesterday’s trading session. The Philly Fed Index seemed to be the downer of the day… losers topped winners 3-to-1 on the NYSE. In spite of all the recent volatility and occasional market upswings, the Dow is now a mere 2.5% above its January low.

And for some broader perspective, check out this graph of the Dow priced in gold:

The Dow, priced in gold, has been a totally hopeless venture since the tech boom. In 2000, you would have needed 45 ounces of gold to buy one “share” in the Dow… today those 45 ounces would fetch you three times the number of Dow stocks.

We recall, working with Bill Bonner in 2000-2001, issuing the “Trade of the Decade: Sell the Dow, Buy Gold.” Eight years on, we’re feeling pretty good about that trade.

Across the Pacific, the Shanghai Composite fell again overnight, this time by 3.5%. We hear that many “lockup periods” among institutional shareholders — holding huge amounts of recent IPOs — will soon expire in China. Coupled with higher-than-usual share offerings from Chinese financial institutions, investors are bailing in fear that a flood of shares will soon hit the market with nary a buyer in sight.

Oil backed off a bit yesterday from its recent high of $101. Light sweet crude fell to $98 in New York yesterday on Energy Department reports of higher-than-expected crude inventories.

The U.S. government has reversed its decision to remove the economicindicators.gov site, reports the Commerce Department yesterday. “Given the feedback… received,” says the site, the government will continue to offer its listing of economic resources for free. As usual, we’ll attribute this victory solely to the power of The 5 and its readers.

Despite the government’s retraction, John Williams of shadowstats.com tells us he will still run an economic indicators site of his own, also for free. Like most other private ventures aimed at replacing a government-sponsored service, we suspect John’s will somehow be superior.

Check it out here.

“Have one of your researchers look up the Great Panic of 1907,” suggests a reader. “The current situation is very similar, but with more zeros in the numbers. Bank fraud, commodities corners, asset collapse. Unfortunately, J.P. Morgan is not alive to solve the problem this time.”

The 5 responds:
We mentioned the eerie similarities between 1907 and today back in September and January. Warren Buffett is probably the closest the U.S. has to a J.P. Morgan today, but while he may lend a hand in the muni bond arena, Berkshire Hathaway is a long way from having the funds to bail out the entire financial system. Buffett says as much in I.O.U.S.A..

“That reader was right,” writes a reader responding to yesterday’s debate. “THE money didn’t vanish. YOUR money vanished into someone else’s pocket. You had $70; now he has it. You were counting on somebody paying you maybe $100 down the road; now he wants to pay you 30 cents, which is the new value of your holdings. This is not ‘semantics’: it’s how to correctly state risk and outcome. Journalists are always asking what happened to THE money, probably because they never had any to lose.”

“The reader surmising that the vanishing $7.7 trillion,” another responds, “somehow ended up being transferred from banks to sovereign wealth funds must not have noticed that money flows only in the other direction.

“Make no mistake about it: SWFs get their money from U.S. consumers buying oil from Abu Dhabi and rubber dog crap or Pocket Fishermen from China. If you don’t like it, then stop buying gas for your car, plastics and other oil-derived products, and anything manufactured in China.

“I hear the Amish make killer wooden toys.”

“The reader who thinks somebody still holds the ‘other side of the trade,’” comments a third, “in the vanishing $7.7 trillion is also failing to consider the multiplying effects of leverage and credit. I’ll buy $1 billion of your paper by putting up $200 million (or so) of my cash in an asset-backed security, giving you $800 million, while at the same time, I’ll sell the $1 billion of paper for $1.1 billion and collect $220 million cash and take my buyers $980 million ABS.

“I’ll be sure to buy a credit default swap from somebody to be sure I get my money and I can pay my seller. The guy I sold to has probably sold again, and then again, etc., etc., until we get about $1 trillion. Pretty soon, all that “the other side of the trade” is holding as real value is the down payments on the deals, while all the credit portions of the deals vaporize.”

Have a nice weekend,

Addison Wiggin
The 5 Min. Forecast

P.S. Are you enjoying your 173% gain? Back in October, in your complimentary issue of Strategic Short Report, Dan Amoss recommended you short Systemax, a computer retailer on the verge of collapse. Last month, just about three months later, Dan recommended you end your short position in Systemax… for a sweet 173% return. During that same period, the Dow fell over 10%. Not too shabby, eh?

The beta issues of Strategic Short Report generated such positive response — and handsome gains — that we’re currently offering three additional months for free. Click here to learn more.

P.P.S. “For most investors, the surest way to profit from the weakening U.S. dollar is to invest directly in strong currencies and their certificates of deposit (CDs)…” Who said it and why? Check it out here.

• U.S. banks drain reserves to Depression-era lows
• Markets fall across the world… service sector data points to recession
• But all hope is not lost: LIBOR returns to normal, insider buying hits 13-year high
• Wheat soars to record high… Kevin Kerr on “big story” in agriculture this year
• China desperate to curb pollution for Olympics… Byron King on its “ripple effect” sure to change the global economy

Oy. Bank reserves in the U.S. turned negative in January for the first time since the Great Depression.

In December 2007, total bank borrowing from the Fed topped 36% of reserves. That was the highest proportion since March 1933, when it hit 46%. Back then, President Roosevelt declared a “bank holiday” to prevent bank runs.

But…“In January 2008,” writes our friend John Williams of Shadowstats.com, “the U.S. banking system met its reserves only by borrowing an amount in excess of 100% of reserves:

“Mr. Bernanke has promised not to repeat the mistakes made by the Federal Reserve in the 1930s,” Williams explains, “whereby the banking system and the money supply collapsed into a deepening, deflationary Great Depression.

“The latest data on bank reserves suggest that something along the lines of an attempted nonrepeat of 1933 is under way. Faced with a devil’s choice, the Fed has acted in the last several months with a series of emergency actions to hold the banking system together and to prevent a debilitating implosion in the money supply. The Fed will create whatever money is needed to prevent a collapse of any portion of the financial system.”

That can’t be good…

Neither can this… the markets greeted “Stupid Tuesday” with a huge, across-the-board sell-off – the worst of its kind since October. The Dow, S&P 500 and Nasdaq all fell 3%. The horrid ISM report we mentioned yesterday caught most of the blame.

And as usual, market malaise in the U.S. spread to Asia. In Hong Kong, the benchmark Hang Seng fell 5.4%. The Nikkei 225 lost 4.7%. Shanghai gave back 1.5% of the 8% gains it posted on Monday.

But lest you think we’re all gloom and doom here at The 5, let us offer you three rays of hope:

First, the LIBOR — the interest rate banks charge each other for overnight loans — has gone down and even briefly dipped under the fed funds target rate. “That means,” explains Dan Denning from the other side of the planet, “the Western world’s major banks are not scrambling for cash as desperately as they were a few weeks ago.

“The falling LIBOR rates also suggest that the big banks are not as suspicious of one another as they were a few weeks ago.”

Second… insider buying among Wall Streeters has reached a 13-year high. In fact, January marked the first time since 1995 when CEOs and other senior corporate officials bought more of their own company’s shares than they sold. “Insider” purchases totaled $683 million last month in spite of the S&P’s 6% decline.

The last time insiders were net buyers, in January of 1995, the S&P rallied 34% in less than a year. What’s more, of the last seven times insiders bought more than they sold — all occurring between 1988-1995 — the S&P rallied an average of 21% in the following 12 months.

Among all the market’s sectors, net buying was most significantly found in communications, industrial, energy, materials and consumer cyclical groups.

And third… our friend Chris Mayer tells us by phone this morning from the Gabelli Pump, Valve and Motor Symposium in NYC that four of the value funds he’s been watching — Third Avenue, FPA Crescent, Tweedy, Browne Global Value and First Eagle — have opened their doors to new investors for the first time in years.

“That signals to me,” says Chris, “these fund managers see value in the market… and they want to buy. But they don’t want to dip into their reserves to do it. So they’re taking on new clients. It’s a good sign.” Mr. Mayer will show us what these funds are looking at on Friday. He’ll give us a full report on the Pump, Valve and Motor Symposium, too. Heh. Bet you can’t wait for that.

Former Treasury Secretary Robert Rubin, now chairman of Citi, doesn’t seem all that worried about the banking crisis either. Rubin told a crowd at Manhattan’s Cooper Union for the Advancement of Science and Art last week, reports Fortune magazine, that “The problems now roiling the markets and forcing the Federal Reserve into a defensive posture are ‘all part of a cycle of periodic excess leading to periodic disruption,’ and that we are not, in fact, on the verge of a financial meltdown.”

Instead, he blamed politicians and consumers for not understanding the mess we’re in. “Part of the problem,” wrote Fortune, explaining a point Rubin also made in our interview with him for I.O.U.S.A., “is that we need a ‘more educated electorate’ to hold politicians accountable. Without that, the U.S. won’t be able to overcome long-term economic challenges, like the troubles surrounding Social Security and budget deficits, or the new problems created by globalization.”

“It’s really not that difficult,” Rubin concludes in our movie. “The old saying ‘There is no free lunch’ is true”… in politics as much as it is true for the national economy.

The dollar hasn’t given up the ghost yet, either. The dollar index even perked up a full point premarket yesterday. Then it continued trending upward throughout the day, ending around 76.2.

Of course, this is only 2 points above its all-time low.

The euro slipped further this morning. It’s barely holding on to $1.46 as we write. Tomorrow, the European Central Bank meets to discuss rates in the eurozone. Given their equally dismal service sector numbers yesterday… a rate cut seems likely, sooner or later.

The pound has fallen 4 cents against the dollar since last Friday. If you’re fresh off the plane at Heathrow, you can score a pound for $1.95 this morning. Also in trading yesterday, the Canadian dollar let slip their U.S. dollar parity, down to 99 cents. But the yen refused to let go of 106.

Gold held its peace during yesterday’s sell-off on Wall Street. The precious metal has been trading between $895-900 most of the week. This morning, it opened in New York just above $895.

Wheat hit a record high $10.33 per bushel this morning. The same bushel would have cost you about 5 bucks in June… yikes! The grain also surged to record or near-record highs in other exchanges in North America and Europe.

“Wheat prices are soaring once again,” comments our Maniac Trader, but that’s not all. “Because of a weather event in Canada and overall global demand, corn is ratcheting higher on the new ethanol mandates, and soybeans… fugetaboutit; soy oil, soy meal… anything soy is the big story this year. Regardless of how much is planted, look for bean prices to continue north.

“Bottom line is if you don’t have some of these trades in your portfolio, you are not going to benefit from one of the biggest booms of all time. As my friend Sean calls it, it’s farmaggedon!”

Join Kevin and his Resource Trader Alert army here.

Olympic medical consultants have urged those traveling to China for the 2008 Olympics to limit physical activity. Hmmm…

A clear and sunny day in Beijing

“In 2008, China will experience increasing levels of pollution of every sort,” comments Byron King, offering a forecast of quite ominous proportions. “We’ll read numerous reports about the increasing damage to human health — in China and abroad — due to Chinese industrial development. The dirty environment of China and its potential impact on Olympic athletes will become a cause similar to the Chinese toy scandal of the past year.

“The Chinese government is likely to pull out all the stops to clean up the air and water near Beijing leading up to the Olympics. Vast swaths of heavy industry will be shut down, including coal-fired power plants in northern China. Electricity will also be diverted to Beijing from other regions.

“This will cause a ripple effect throughout the Chinese economy as thousands of plants close and millions of workers are displaced from jobs. Overall Chinese economic output will be affected, and there will be a disruption in the Chinese demand for commodities.

“This turbulence in the Chinese economy may also be the prelude to a major slowdown in Chinese economic activity after the Olympics. Chinese leaders are already looking for ways to get the breakneck pace of economic growth and price inflation under control, and post-Olympics will be a logical time for the Chinese economy to take a breather.”

That is, if it can catch its breath at all. For more on the global battle to reduce emissions, see Byron’s Energy & Scarcity Investor.

BHP Billiton offered to buy Rio Tinto for $147 billion last night. Rio responded with the “carefully consider” lip service, only to reject it this morning. Should the deal eventually go through, it will be the one of the largest of all time, and BHP will become a near-monopoly giant in the mining industry.

Goldman Sachs, Citigroup and five other banks have offered to lend BHP the $55 billion it would need to finance the deal… the largest loan in the history of business.

“China’s SWF played a masterstroke getting in between BHP and Rio,” opines one reader. “They’ve thwarted an almost certain rise in the iron ore price, and still managed to get a 9% stake in the company. It can block a deal; it prevents pricing power from swinging to the producers; and if BHP ends up buying Rio, China makes a quick 10% on its investment.

“That’s a good deal. And they were in a position to make it because A) they had the money and B) they were thinking in those terms.

“Our jackass politicians and corporate thieves are not. And the American economy is going to pay for it.

“No one really knows, but I don’t imagine the average Chinese spends too much time thinking about how important America is to his future. Maybe Chinese policymakers do, if only because America still has aircraft carriers and nuclear missiles. But I also imagine that in China’s long-range strategic view, the U.S. is just another market, perhaps hollowed out by a massive wealth deflation… and certainly not as important to China’s future as Americans would like to believe.”

The 5 responds: Of course, that’s not necessarily a bad thing. Might give us a chance to reign in a little of that greatest of American exports: political hubris.

Cheers,

Addison Wiggin
The 5 Min. Forecast

P.S. Sovereign wealth funds will continue to play a major role in stabilizing the global markets in 2008. If you haven’t had a chance to read our report on the subject and are not a subscriber to Christopher Hancock’s Free Market Investor, you’re missing out on one hell of a movement in global capital… don’t be afraid to grab a little piece for your own retirement fund.

P.P.S. If you’re still in an adjustable-rate mortgage, the Fed may be handing you a reprieve by reacting as they have to the credit squeeze. We told Prashant Gopal, the gentleman who covers real estate for BusinessWeek, as much on Friday. Check it out here.

• U.S. markets stage strong comeback… back to normal or sucker rally?
• Citigroup drops the bomb… a quick and dirty account of the latest carnage below
• Inflation at 26-year highs, retail sales slump… is anyone not calling for recession?
• Bush pleads for more oil… why the Saudis won’t be saving us this time
• Can’t afford your new home? Burn it down… Foreclosure arsons flaming up across U.S.

You know you’re hurting when IBM posts your most exciting news of the day….

The U.S. stock market rallied yesterday, sending the Dow and Nasdaq up about 1.5% and the S&P 500 up just over 1%. Nearly the entire day’s gains were fueled by an early-morning earnings announcement from IBM. Big Blue beat fourth-quarter earnings estimates by a handsome margin.

But we’re willing to bet very few people noticed this: IBM’s outsized profits were the result of currency moves in its global sales.

“If you take out the currency component,” Chuck Butler from EverBank points out, “IBM’s sales increased 4%, not the 10% for revenues expected. Even big old (boring) IBM can make some money in the currency markets!”

In all, the move shows how desperate the Street is for good news.

And with good reason. Citigroup announced a cornucopia of bad news this morning:

– $18 billion write-down
- $12.5 billion cash infusion from outside investors, including Government of Singapore Investment Corp, Saudi Prince Alwaleed bin Talal and former Citi CEO Sandy Weill
- 41% dividend cut
- 70% decline in year-over-year revenue
- a 4,200 job cut — at minimum
- $9.8 billion net loss — the biggest quarterly loss in the bank’s 196-year history.

Merrill Lynch, Wells Fargo, JP Morgan and Washington Mutual all report earnings this week. While Citi is expected to be the worst of the bunch, similar write-downs and losses are practically guaranteed.

When the dust settles, this might be the worst quarter for financials since the Great Depression.

Rep. Henry Waxman, chair of the House Oversight and Government Reform Committee, has requested Chuck Prince, Stan O’Neal, and Angelo Mozilo to testify at a House hearing next month.

Congressman Waxman wants to ask these former Citi, Merrill and Countrywide CEOs if their bloated salaries and severance packages were “justified in light of your company’s recent performance and its role in the national mortgage crisis.”

It’s so easy to be cynical about Congress on this one… we’ll have to pass. At least it will make for interesting TV.

Neither is there any relief in sight for the economy:

Inflation, for example, at the wholesale level rose to 26-year highs in 2007, reports the Labor Department this morning. While the producer price index managed a tiny 0.1% fall in December, the government reported this morning that total 2007 producer inflation rose to 6.3%, a level not achieved since 1981.

The retail season was rather anemic, too. Total monthly retail sales fell 0.4% in December, says the Commerce Department today. The “biggest shopping month of the year” proved to be the sharpest monthly decline in retail sales in six months. November sales were revised down to a 1% gain, from a previously recorded 1.2%.

And if that didn’t fan the recession fire enough, the National Retail Federation also lowered its 2008 sales forecast to 3.5% — its weakest pace in six years.

And the Baltic Dry Index, which is a measure of freight costs for shipping dry goods like coal and grains, just recorded its biggest two-day drop since its inception back in 1985. It’s now down about 30% from its all-time high in November.

“The slowdown in freight has devastated the shippers,” comments Chris Mayer.“Take Excel Maritime, which was $80 in October… It’s about $30 today. That’s pretty typical. Most shipping stocks have been cut in half. Just another point of evidence that a recession is hitting the U.S.”

The mainstream seems to be taking notice too:

According to The Economist, almost 60% of Americans believe we are in recession.

“High energy prices can damage consuming economies,” President Bush mumbled under his yarmulke today while on a trip to the Middle East. “When consumers have less purchasing power, it could cause the economy to slow down.”

“I hope OPEC nations put more supply on the market,” he suggested. “It would be helpful.”

Aside from threatening Iran, President Bush was visiting the Middle East in hopes of negotiating an OPEC output increase. Iraq is not a planned stop on his itinerary.

Saudi Arabia, perhaps OPEC’s most powerful constituent, will not increase output for the sake of the U.S. economy.

“A recession in the U.S. is very significant to the oil market and demand,” says Saudi oil chief Ali Al-Naimi. “I’m sure that no one would look with pleasure upon a recession in the U.S. But we will raise production when the market justifies it. This is our policy.”

Even if Saudi Arabia could increase their oil output, which is a debate in and of itself, they won’t be doing so for the sake of U.S. consumers. “Over the years,” the sheik continued, “the U.S. has played an important… and appreciated role in the development of Saudi Arabia. However, some people mistakenly think that the [relationship] is controlled by how much oil the United States imports from Saudi Arabia.”

Take that, W.

Gold popped as high as $914 yesterday, setting yet another record high.

There are few assets outperforming gold during this rocky first month of 2008. While the U.S. stock market has fallen 4-5%, gold is up over 8% since Jan. 1.

“The new gold futures exchange in Shanghai,” comments Ed Bugos on our mention of the new exchange yesterday, “is designed for retail investors. According to press reports, the exchange traded one-third of the average Comex daily trading volume on its first day and gold was trading at the equivalent of $1,000 per ounce.

“That’s a $100 premium over the international gold price.

“The Chinese exchanges are still cut off from the rest of the world, which is the reason for the discrepancy. But there is little doubt in my mind that besides the debt crisis and the central bank response, the launch of futures trading in gold on the SFE last week is responsible for the bullish take off in gold this month.”

U.S. mutual fund investors will likely be hit with the biggest tax bills in market history this April.

According to the Financial Times, American mutual funds will most likely ring in a record $350 billion in capital gains taxes for their 2007 performance. Despite a rocky second half, 2007 mutual fund investors will pay more in taxes this year than during the height of the tech boom, whether they sold their positions or not… ouch.

The spike in foreclosures heated up another trend in housing last year: arson.

Allstate has seen a significant spike in arsons among homes in foreclosure, reports Fortune magazine. In California, one of the states hit hardest by the subprime crisis, “questionable” residential fires increased by 76% in 2007.

With “untold thousands of homeowners struggling with ballooning subprime mortgage payments,” reads a report from the Coalition Against Insurance Fraud, “fraud fighters are watching closely for a spike in arsons by desperate homeowners who can no longer afford their home payments.”

Apparently, this is a common problem when the housing market slows down. Go figure.

“Today’s news about Citi,” writes an overseas correspondent, “was enough to inspire me to move another huge chunk of our savings out of Citibank and into another account.

“I also noticed Citi is seeking more sovereign wealth money — from Abu Dhabi — after being rejected for same from China, which is no longer interested. Wow. Beijing thinks Citigroup stinks so much they don’t even want it.”

Yesterday, a reader wrote: “There is not a shred of fiscal conservativeness among the current batch of presidential candidates.” And then the mail came…

“Obviously, the only information he’s been fed is from the biased, tightly controlled media,” says one reader. “As everyone should know, Ron Paul is the ONLY true fiscal conservative running for president. And he IS running for president! He wants to repeal the income tax, the inflation tax and the 16th Amendment.

“Of course, along with this, he will drastically reduce government spending. I’m sick of people whining about the government, the taxes and the welfare state and then refusing to vote for a stellar candidate when given the opportunity. The whiners will get what they deserve if their whining is not accompanied by action. Do you really, truly want change? Then quit whining and vote Ron Paul for president.

“If there is to be any shred of financial hope for the USA within the next four years,
writes another, “it lies in Ron Paul winning the election. If not, the fiscal calamities promised by this and other prognosticating readers are essentially guaranteed

“Ron Paul,” writes a third, “has very sensible ideas, including the unusual notion that elected representatives, who swear to uphold the Constitution, should actually do that.”

And so on… we received about 30 responses similar to these.

The 5 responds: Here’s the problem. Yesterday, Paul Krugman, writing in The New York Times responded to the increased fear among Americans that the economy is heading into recession.

“Since this is an election year,” Krugman writes, “the debate over how to stimulate the economy is inevitably tied up with politics. And here’s a modest suggestion for political reporters. Instead of trying to divine the candidates’ characters by scrutinizing their tone of voice and facial expressions, why not pay attention to what they say about economic policy?”

He then goes on to review the economic policies of all the candidates. Except one. He conveniently forgets to mention Ron Paul. The only candidate who has actually ever studied or remotely understands economics… and the country’s biggest economic populist (blowhard) doesn’t even mention him.

What can you do? Lest we begin to sound like a recording, the country will need a financial crisis before people are willing to listen to ideas like those espoused by Dr. Paul. And… if current trends are any indication, it looks like it’s going to get one. Probably a doozy.

Cheers,

Addison Wiggin,
The 5 Min. Forecast

P.S. If you’re interested in joining us in Vancouver this summer, today’s your last chance to take advantage of our early registration pricing. We’ll hold our annual Investment Symposium in late July again this year at the lovely Fairmont Hotel, Vancouver. If you’re already thinking about being a part of this incredible event, sign up today and save yourself a couple hundred bucks. See you there…

P.P.S. Thought you might get a kick out of this… we’ve seen several folks looking for tickets to the premiere of I.O.U.S.A. on Craigslist in Salt Lake City. Reminds me of my misspent youth searching for tickets outside sold-out Grateful Dead shows.

By the way, if you do have tickets, or know of someone who does, please stick around after the premiere for a Q&A session. David Walker, the federal government’s chief accountant, and Bob Bixby, director of the Concord Coalition, will be there to field the tough questions. Not exactly Jerry Garcia and friends we know, but should still prove to be a stimulating evening.

• So much for the January effect: S&P reaches a record high…set in 2000
• Yet foreign bank says invest in U.S. for the first time in a decade
• Gold punches through $900… James Turk on how to identify your next buying opportunity
• Kevin Kerr’s first 2008 grain outlook. Plus, forget banks… record-high prices have robbers knocking off grain silos
• City of Cleveland sues Bank of America, Citigroup, Merrill Lynch, etc., for being a “public nuisance”

U.S. markets took yet another beating on Friday…the Dow and Nasdaq lost just short of 2%. The S&P 500 fell 1.3%.

Year to date, the Dow and S&P are down 5%. The Nasdaq has fallen 8% in the first two weeks of 2008. This is the worst opening sell-off in the S&P by percentage since 1982. In points, it’s the worst ever.

Thus, the S&P 500 is lower today than it was eight years ago. Had you invested in the S&P during the peak of the tech boom in early 2000, you’d have… well, just about 0% returns today.

We suppose dividends might be keeping you in the black, but still… ouch. Who could have seen this coming? Oh yeah, we did.

Yet Credit Suisse has recommended an overweight position in U.S. stocks for the first time in 10 years.

“By virtue of the weakening dollar and the Fed’s easing cycle,” said a report from the Swiss bank, “monetary conditions are now far looser in the U.S. than in Europe.” The authors of the report believe the Fed will be “more balanced in its assessment of inflation risks” moving forward. The same report suggested investors take on underweight positions in European markets.

Analysts at HSBC recently made a similar call.

The dollar got shellacked yet again over the weekend. The dollar index slipped down to the mid-75 range.

A weaker dollar is to “thank” for record-high New York City tourism spending, city officials announced over the weekend. NYC visitors spent a record $28 billion in 2007, propelled by a 17% jump in foreign travel. 8.5 million overseas travelers visited NYC last year, about 20% of all tourists visiting the U.S. in 2007.

Get used to $900 gold, say analysts at Goldman Sachs. The bank raised its six-month outlook up to $900.

“Gold has risen 57 of the past 82 weeks,” writes James Turk, hoping to pinpoint those exact buying opportunities, “which is 69.5% of the time. Gold’s appreciation on up weeks was $13.82 on average.

As of last week, too, traders in China can trade gold futures on the Shanghai Exchange. The volume of speculation in the yellow metal should rise dramatically… as has been the impact on all markets the Chinese have set their sights on.

Moody’s threatened to cut Bank of America’s debt rating Friday. After taking on Countrywide, Bank of America’s ability to pay back loans may have worsened, warns the rating agency. “The transaction gives Bank of America a leading position in mortgage banking, but presents challenges,” says Moody’s, “including integration, volatile mortgage asset valuations and potential litigation.”

The city of Cleveland is suing 21 banks, Bank of America included, for their role in exacerbating the city’s subprime fallout. In fact, the lawsuit filed last week essentially holds the banks responsible for the foreclosure crisis that has left the city with, as they claim, hundreds of millions of dollars in related expenses.

And if one of these cities actually wins? Oy… look out.

“The U.S. needs 15 million more grain acres in the next 24 months!” shouts our Maniac Trader. Before Friday’s 2007 World Agricultural Supply and Demand Estimates (WASDE) report, more than one market pundit was calling a top to the latest agriculture boom. Wheat, corn and soy prices are all at or near record highs, and ag companies like Monsanto, Mosaic and John Deere were the darlings of Wall Street in 2007.

But according to Kevin, the results of the latest WASDE report reveals an agricultural sector with little or no slowing demand:

“We need 9 million more corn and bean acres (7.6 million corn/beans) this spring and another 5.6 million in 2009 (5.7 million corn/beans).

“This is largely out-of-control demand and will require an unprecedented acreage acquisition and reallocation endeavor. Even with massive possible acreage manipulation through market price, we still need over 3 million acres of pasture this year and another 3 million next year to move to grain production to have any hope of balancing the situation.

“Washington policy has created a man-made food shortage. The grain markets may eventually cool off, but not anytime soon!”

The grain boom is so pervasive, thieves in Kansas are knocking off grain elevators, instead of banks.

In recent weeks, as many as a dozen incidents have occurred, a report on NPR over the weekend declared. Bobby Lee Roys everywhere are backing their big rigs into grain elevators and making off with hundreds of bushels of raw wheat.

So far, some $50,000 — about 5,000 bushels — in wheat has been stolen. A year ago, the same booty would fetch only $15,000.

Meet the new leader of the U.S. anti-tax movement:

Wesley Snipes, the star of such “acclaimed” movies as Blade and White Men Can’t Jump, goes on trial today for tax evasion. From 1999-2004, the actor earned about $40 million, and paid exactly $0 in taxes.

Snipes stopped paying taxes in 1999 because of the 861 provision in the federal tax code. The provision, according to anti-tax adherents, does not require you to pay taxes on wages.

“Snipes is already drawing whole new demographics to the movement,” The New York Times quotes a Maryland woman who follows the anti-tax movement saying. “Tax protesters used to be white, 50 or older, blue-collar, rural and often connected to racist movements, but Snipes is young, urban and famous.”

Heh… good luck, Wesley. We’re sure they’ll find a nice chic cell for you.

“Nice Tata” writes a reader. “‘The people’s car’! Seems like there was another little car that came out back in the ’30s, with great fanfare, and produced by the regime in power at the time — the Volkswagen — ‘the people’s car’! Keep up the good work!”

“Regarding the Moody warning that the USA’s credit rating may be less than AAA by 2017,” responds another reader, “2017 is really not that far away. It takes decades to turn around the gigantic ship ‘USS Enterprise.’ So it is increasingly probable that one day, the USA will be ‘officially’ not the safest haven for investing. In fact, it already does not provide the best return for your money.

P.S. You’ve got just a few more hours to sign up for three free months of Energy & Scarcity Investor. At midnight tonight, it’s back to full price for Byron King’s elite new service. If you’re looking for small-cap solutions to the booming energy and resource markets, look no further. Byron’s already assembled a portfolio full of unique energy plays, including an array of enticing geothermal picks. Learn more about them here.

P.P.S. Tickets for the world premiere of our movie this Saturday at Sundance are completely sold out. All the screenings, for that matter, are sold out. Some readers have even gotten in touch with one of the producers, saying they’re “in the know”… and can we score them some tickets? Unfortunately, we’re told that tickets are so tough to come by that we — the crew that wrote, directed and produced the film — may not be able to get into some of the shows.

ADDITIONAL RESOURCES
Stocks off to worst start since 1982
Cleveland Sues 21 Banks Over Mortgage Foreclosures
Gold passes $900 on dollar weakness

• The Dow officially enters “correction”…
• How Middle Easterners just became the largest shareholders in the U.S.’s biggest bank
• Citigroup to fire up to 45,000 souls… some perspective on that “massive” cut below
• Home prices fall at yet another record rate… is any city safe from the housing crisis?
• OPEC delays $100 oil… Kevin Kerr on the real driver behind the latest oil prices

After a morning filled with strong gains and post-holiday optimism, markets took quite a turn for the worse yesterday and fell steeply in unison. The Dow fell 1.8% yesterday, pushing it more than 10% below its all-time high set on Oct. 9 — a textbook “correction.”

Year to date, the Dow is up 2.2%. But that’s a gain worthy of your envy, if you’re an S&P 500 investor. The S&P, which already “corrected” back in August, fell an additional 2.3%. It’s now down 0.8% for the year.

The Nasdaq took a 2.1% haircut on the day. But it’s holding up rather well, considering, with a whopping 5.2% gain in 2007.

Today’s big news… ought to bring protectionists out of the woodwork.

Citigroup, the largest bank in the U.S., sold $7.5 billion of its own shares to the Abu Dhabi Investment Authority this morning. This massive trade accounts for 4.9% of Citigroup’s entire enterprise, making the folks in Abu Dhabi the bank’s largest shareholder.

The “equity units” purchased by the ADIA will be converted into shares in 2010. But Citi is so desperate for cash right now that it offered an 11% annual yield on those units until then — double the yield Citi offers its bond investors.

Citi also let slip to CNBC yesterday it’s planning “massive” job cuts. The total number could reach as high as 45,000, “people in the know” estimate.

Let’s put that number into perspective, shall we? Imagine filling every seat in Wrigley Field…

and then firing all of them… plus a few thousand more.

“Selling a 4.9% stake in Citigroup is a step that is not taken lightly,” comments Mish Shedlock. “Nor is another round of massive layoffs.

“Monday’s news reports on Citigroup raise more questions than they answer. The one thing we do know for certain is that Citigroup was (and likely still is) severely capital-restrained. On Nov. 5, I said that Citigroup was fighting for its financial life. It still is.”

Mish has made some pretty shocking predictions about how this new round of bank bleeding will play out in 2008. Our legal team is pouring over them as we speak. Given his forecasts this year on the subprime market, housing and specific companies like Countrywide… you’re not going to want to miss this report. He’s got a hot hand and his fingers on the pulse… Watch this space.

“American-style capitalism has evolved into a bizarre marriage of financial gimmickry and governmental coddling,” writes Eric Fry this morning. “Very few companies produce much of anything other than derivatives and press releases. This situation would not be so bad if the derivatives possessed a bit of value and the press releases possessed a bit of truth. Instead, the U.S. economy lurches from greed to deception to disaster, and back to greed, without ever eliminating all the flaws and the felons that cause all the problems.

“When we should be lopping off heads (so to speak), we dispense multimillion-dollar severance packages; when we should be marking to market, we mark to markup; when we should be allowing idiotic speculations to fail, we devise new ways to finance idiotic speculations.”

Sovereign wealth fund Dubai International Capital bought a “substantial” stake in Sony yesterday, its first venture into the Japanese market. Neither the DIC nor Sony officials revealed what “substantial” means in dollar terms, but word on the street is that Dubai now owns about 1% of Sony, worth nearly $500 million.

According to the Free Market Investor’s Chris Hancock, these investments by big sovereign wealth funds could save your retirement. If you’re not familiar with his strategy, check it out here.

Home prices fell in every region of the U.S. in September. At least, if you’re inclined to believe the Case-Shiller price index, which published its monthly press release this morning.

“Consistent with prior 2007 reports, there is no real positive news in today’s data,” reports a depressed Robert J. Shiller, the index’s steward. “Most of the metro areas continue to show declining or decelerating returns on both an annual and a monthly basis.”

All 20 cities followed by the group saw a decline in home values during the month.

Year over year, Case-Shiller’s 20-city price index fell 4.9%, the largest drop in the index’s 21-year history. From a quarterly perspective, home prices fell a record 1.7% from the second quarter to the third, and down 4.5%, compared with the same period last year — also a record.

In 2008, real estate foreclosures will likely result in a $1.2 trillion decline in property values nationwide,
according to a gloomy report released by the forecasting firm Global Insight.

The group also expects a 7% drop in average home prices across the country; a $26.6 billion combined decline in economic activity in five of the nation’s biggest metro areas: New York, Los Angeles, D.C., Dallas and Chicago; and a decline in the national GDP to 1.9% — less than half our recent-history average growth.

Not by coincidence, the Consumer Confidence Index sank to a two-year low this month, reported the Conference Board this morning. The Board’s measure of consumer confidence fell from 95.2 to 87.3 — both the lowest level and the biggest monthly decline since Hurricane Katrina struck in the fall of 2005.

According to the survey, consumers believe that the economy and employment are taking it in the pants… and that inflation will continue to rise in 2008.

Gold traders have been ambivalent about the trends. The metal rallied up to $836 yesterday, but this morning, it’s back down to $815.

As oil stood a few cents below $99 yesterday, we were already dreaming up “Oil $100” headlines. But it didn’t happen. Oil trades at $94 and change this morning, following whispers from OPEC that it may increase production.

“There is immense global pressure on OPEC to increase output,” opines our Maniac Trader, Kevin Kerr. “But we won’t know the real answer until Dec. 5. Sentiment might bring prices down until then, but we just can’t know anything for certain until the next OPEC meeting.

“Until then, the dollar is my biggest concern when it comes to $100 oil. We saw oil pull back yesterday after the OPEC news, but then it rallied as the dollar fell again… the dollar is a huge driver for oil prices right now.”

The dollar had it tough yesterday and overnight. It sunk to a two-and-a-half-year low versus the yen… going as low as 107. The pound rallied back to $2.07. The euro eked ever closer to $1.49…

“I just spent a week in Uruguay,” comments a reader on the fate of the dollar in global markets. “I was hiring workers to make improvements to my home there. Guess what? They refused to provide quotations in dollars and wanted to make sure they were paid in Uruguayan pesos. When Uruguayans value pesos more than the dollar, it is a sad day.”

Goldman Sachs downgraded the entire auto sector yesterday to “cautious.”

“The automotive industry in the USA stinks,” writes a reader. “It is all on the verge of bankruptcy. It’s not that the industry is producing junk. Its product is of high quality. It’s just that its long-term liabilities will eventually drag it under.

“It needs to do something different to get the customer back. ‘Different’ is the key word. Right now, it’s the ‘same old, same old.’ When is one of the companies going to come out and say, ‘By the year 2012, all new Chrysler cars will average 60 miles per gallon. We are doing this to show our customers we are the LEADERS in the automotive industry. We will do whatever we can to help our country reduce its dependency on foreign oil’?

“Einstein stated that insanity is doing the same thing over and over again but expecting different results. Aren’t the sources of our problems in this country pretty obvious?”

The 5 Responds:
Last month, Canadians bought more U.S. cars than ever in history, presumably because their dollar is kicking ours in the cojones. How’s this for a mission statement:

“By 2012, GM promises that every car will be worth way less than it was in 2007.”

We can reverse-engineer the auto industry… and produce Yugos and Daihatsus by the middle of the next decade. How’s that sound?

Regards,

Addison Wiggin
The 5 Min. Forecast

P.S. We’ve received word this morning that nearly 300 seats at our Vancouver event in July 2008 are already spoken for.
That’s a phenomenal response… nearly half of what’s available. The Fairmont is a beautiful old hotel, and as much as we’d like to take more attendees, we’d be really stretching the facility to do so.

Our suggestion: If you want to attend next year’s event, make your plans early. Discounts are still available, too, until January 15th. Don’t forget… if you are an Agora Financial Reserve member, you may attend our event for free.

The 9th Annual Agora Financial Investment Symposium
The Fairmont Hotel Vancouver
July 22-25, 2008

ADDITIONAL RESOURCES
Citigroup to Raise $7.5 Billion From Abu Dhabi State
Massive Job Cuts Expected At Citigroup
Consumer confidence sinks to two-year low in Nov.

• OPEC contemplates abandoning our “worthless paper” greenback
• 18 nations ditch the dollar… Japan and China slowly exercise their “nuclear option”
• Goldman downgrades Citigroup, predicts up to $15 billion in losses
• Wall Street I-banks to issue $38 billion in bonuses despite dismal 2007
• Gold prices got you down? James Turk on the next stage of the gold bull market
• Plus… Chris Hancock on how Beijing could be literally buried in sand

“They get our oil and give us a worthless piece of paper,” Iranian President Mahmoud Ahmadinejad told his OPEC cronies on Sunday. OPEC’s 13-member cartel met over the weekend, and the decline of the dollar was clearly on the minds of its ministers.

“All participating leaders showed an interest in changing their hard currency reserves to a credible hard currency,” Ahmadinejad said. “Some said producing countries should designate a single hard currency aside from the U.S. dollar… to form the basis of our oil trade.”

“That’s right heathens… 2… $200 a barrel”

“Don’t you see how the dollar has been in free-fall without a parachute?” chimed in fellow nutjob and OPEC minister Hugo Chavez. “The empire of the dollar has to end,” said he, urging his OPEC brethren to shift to the euro.

Curiously, neither mentioned their own worthless paper currencies during the press conference.

In the official OPEC postmeeting statement, Secretary General Abdalla Salem of Saudi Arabia said that OPEC will “study ways and means of enhancing financial cooperation among OPEC… including proposals by some of the heads of state and governments in their statements to the summit.”

Iranian and Iraqi ministers will both be spearheading studies on the dollar and its affect on OPEC’s oil revenues and currency reserves.

As of this writing, OPEC controls 40% of the world’s oil production and 75% of its reserves.

Friday’s Treasury Dept. TIC data revealed that Japan, China, Caribbean banking centers, Luxembourg, Hong Kong, Korea, Germany, Singapore, Mexico, Switzerland, Turkey, Canada, the Netherlands, Sweden, France, Russia, Ireland and Israel were all net sellers of U.S. Treasuries in September.

For three months in a row, Japan and China — the world’s largest holders of U.S. government debt — were sellers of such Treasuries. They now hold less than $1 trillion in dollar reserves.

From a trading perspective, the dollar held on to its recent rally over the weekend. The euro, pound and yen all stood mostly still… at $1.46, $2.04 and 110, respectively. The dollar index remained around 75.7, less than a point above its all-time low.

“So long as the dollar weakness does not create inflation, which is a major concern around the globe for everyone who watches the exchange rate, then I think it’s a market phenomenon, which, aside from those who travel the world, has no real fundamental economic consequences,” uttered Alan Greenspan yesterday morning, echoing the same sentiment Ben Bernanke told Ron Paul last week.

Whether Greenspan is expressing his true opinion or simply aiding in post-OPEC meeting damage control, we don’t know. He’s made a fabulous career out of saying one thing and meaning another.

“If we can get beyond this housing problem, I think we’ll do pretty well,” said Greenspan.

The U.S. economy doesn’t look like it will be getting through “this housing problem” anytime soon. This morning, the National Association for Business Economics forecast 1.5% growth in the fourth quarter, down drastically from the rate of 3.9% in the third quarter. NABE previously forecast fourth-quarter growth at 2.5%, but decided to revise this forecast based on current housing and credit conditions.

The NABE revised its yearly growth forecast, as well, from 2.8% down to 2.5%.

“Alan Greenspan really made a mess of all this,” retorted Joseph Stiglitz, former World Bank chief, last week. In an interview on Friday, Stiglitz reiterated an argument you’ve heard from us before… that the U.S. economy sits on the brink of recession because of the “mess” left by Greenspan. “He pushed out too much liquidity at the wrong time. He supported the tax cut in 2001, which is the beginning of these problems. He encouraged people to take out variable-rate mortgages. That helped create the subprime crisis.”

As a result, Stiglitz told reporters he was “very pessimistic” about the state of the economy. “Americans have been taking money out of their houses to finance a consumption binge,” Stiglitz said. “Last year alone, mortgage equity withdrawal was between $850-950 billion. That game is over.”

Stiglitz said that the U.S. faces “a very major slowdown, maybe recession.”

Goldman Sachs downgraded Citigroup to a “sell” rating this morning. GS analyst William Tanona estimated that Citigroup will incur an additional $15 billion in write-downs by the end of the first quarter of 2008.

“Given the dislocations in the credit markets, we have become more pessimistic,” said Tanona. “Citigroup will likely face an increasingly challenging operating environment, which is likely to pressure results in many of their businesses.”

While he was at it, Tanona also cut price estimates for Merrill Lynch, Morgan Stanley, Lehman Bros., Bear Stearns, J.P. Morgan and E*Trade. While we expected dull holiday trading this week, news like this doesn’t bode well for benchmark indexes.

Yet Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Bros. and Bear Stearns will hand out $38 billion in bonuses this year, up a billion bucks from 2006. Split among about 186,000 employees, the five investment banks will pay an average bonus of $201,500. Not bad considering their market caps are down a collective $74 billion this year.

Such a bonus is four times the $48,201 median household income last year.

Gold looks like it they may have ended its free-fall this weekend. The spot price for immediate delivery traded as low as $785 and up to $796 in weekend trading. As we write, an ounce sets you back about $786.

“Last week, gold dropped $46.80, which is a decline of 5.6%,” summarizes James Turk. “That drop seems fairly large, but let’s step back to get some perspective.

“It is interesting to note that in the 79 weeks since reaching its high in May 2006, there have now been five weeks in which gold has lost 5% or more. So a 5% decline in one week is not new.

“It is reassuring to note that gold eventually overcame the four previous declines of 5% or more. In other words, last week’s decline came after gold had already made a new 27-year high. Recovering from sharp short-term corrections is a clear sign that gold is still in a bull market.

“Once this current correction ends, I expect gold will climb higher.”

Mubadala Development, an Abu Dubai sovereign wealth fund (SWF), will buy a 9% stake in microchip maker AMD. Mubadala’s $700 million investment will surely attract interest from protectionists in Washington, as AMD’s technology is very much a part of current defense and national security systems.

“Each year, the Gobi Desert devours 2,460 square miles of Chinese soil, an area roughly the size of Delaware,” writes Free Market Investor Chris Hancock. “Violent sandstorms threaten to conquer Beijing. Dunes now tower just 43 miles from the ancient capital…firmly marching south, like Sherman through the soft Georgia pines, at a brisk 12-15 mile per year clip:

“Why is Asia’s largest desert growing so quickly? It is because of a process scientists call desertification. Basically, China’s rapid economic growth comes at a great price, as the fast-approaching desert threatens to blanket Beijing before the Summer Olympics in 2008.

“The solution? The ‘Green Wall.’ Beijing officials set aside $8 billion to construct a natural wall of trees spanning more than 2,000 miles.

“But they’re no match. Trees need water. And air pollution inhibits precipitation. Researchers from Israel’s Hebrew University of Jerusalem and the Chinese Academy of Meteorological Sciences found that on hazy days, precipitation from the top of Mount Hua in China’s northwestern Shaanxi province is cut by up to 50%.

“Consequently, one-quarter of China currently finds itself buried beneath sand… two out of every three major Chinese cities have less water than they need. Cities in northeast China have roughly five-seven years left before they completely run dry. China’s immediate need for water remains paramount.”

Cambodia aims to open a stock market by 2009, reported government officials recently. Last month, Cambodian senators passed a law that legalizes the issuance and trading of stocks and bonds… all that remains is the infrastructure required to maintain a stock market. Driven largely by a booming textiles market, Cambodia’s economy has grown about 11% per annum in the last three years.

But buyer beware… this one won’t be for the faint of heart: Moody’s currently rates Cambodian bonds a “B” grade investment, five steps below “investment grade” and somewhere within the realm of subprime-backed CDOs.

“Thank you for reporting the fed raid at Liberty Dollar/NORFED,” writes a reader. “It is a given that times change, and that understanding of the times also change. Established institutions, as Professor Carroll Quigley of Georgetown University School of Foreign Service pointed out, either restructure and adapt in order to maintain the purposes for which they were formed, or those institutions will be outflanked, crawled over or run through by the tides of history.

“The current enforcement activities of the DOJ/IRS/Federal Reserve monetary complex are not at all encouraging as indicators of graceful adaptation.”

The 5 responds:
Amen. We suspect there’s a lot more strife coming down the pike. It took two world wars before the British pound, and the institutions developed to support the Victorian era gold standard, gave way to the establishment of the Bretton Woods exchange rate system… and its concomitant governing structure.

If you want to follow the strife first-hand, Bernard’s been hammering out daily updates on the raid and his strategy for dealing with the feds. You can read all the details here.

Regards,

Addison Wiggin
The 5 Min. Forecast

P.S. Don’t forget, you’ve got about 24 hours left to take advantage of our Energy & Scarcity Investor offer. To honor its introduction, we’ve slashed the price by over 30%. Click here to learn more about ESI… in this era of rapidly expanding energy opportunities, we can’t think of a more appropriate investment advisory.

ADDITIONAL RESOURCES
Even in brutal year on Wall Street, $38 billion in bonuses to be paid
OPEC members clash over weak dollar
Desert Army Invades Chinese Capital

• How two Chinese men just put the dollar in the all-time dumps
• Gold 1% below all-time highs… Bugos shares his short-term outlook
• $98 oil… why Kevin Kerr is thankful for the coming $100 barrel
• What’s a surer bet… Brazil’s economy or Merrill’s future? Eric Fry on the unlikely answer
• Dan Amoss explains GM’s massive third-quarter loss… the second biggest in S&P history
• Jackson about to lose the Neverland Ranch… could the subprime mess sting the King of Pop?
  

“The world’s currency structure has changed; the dollar is losing its status as the world currency,” said Xu Jian, a Chinese central bank vice director, yesterday. “We will favor stronger currencies over weaker ones, and will readjust accordingly,” confirmed Cheng Siwei, vice chairman of China’s National People’s Congress, at the same conference.

And that was all she wrote for the U.S. dollar.

While China has yet to formally announce a change in its foreign exchange reserves, the allusion was enough to spook traders. Here’s the breakdown:

Euro: $1.47 — an all-time high versus the dollar
Pound: $2.10 — 26-year high versus the dollar
Canadian dollar: $1.10 — rose almost 2 cents in one day, a new all-time high
Australian dollar — 93.9 cents — gained over a cent overnight, to a new 23-year high
Yen: 113 — gained a full point versus the dollar to 2-month highs
The dollar fell against every other actively traded currency… 16 in all.

Profit-taking has since chased down several of these currencies from their peaks, but as we write, all remain above previous highs.

For its part, the dollar index fell an entire point overnight, to 75.20 — a new all-time low.

Since the Fed cut the discount interest rate on Aug. 17, the dollar index has lost over 6 points. At some point, you’d expect to see a healthy contrarian rally… but there’s nothing stopping bearish sentiment today.

“Construction workers in the booming Arab emirate are increasingly unhappy,” reports The Economist in its latest issue, highlighting an overseas effect of a weak dollar. Last week, thousands of angry workers went on strike for two days, demanding an increase in wages. Inflation in Dubai is “officially” estimated around 10% this year, but if the UAE government is anything like ours, it’s probably a lot higher.

“The falling value of the dollar has also affected workers, especially the unskilled and semiskilled. Remittances in dirhams, the UAE’s dollar-pegged currency, are worth less back home, particularly in India, where the rupee is gaining strength,” reports The Economist.

Gold prices soared on news of a weaker dollar. Surging as high as $844 and now holding at $840, a new all-time high for gold seems possible by the end of the week.

“We have seen a $200 advance since August,” notes Ed Bugos. “The market is only $10 away from its record $850 high, made in 1980.

“Technical analysts measure the potential for a move by the size of the consolidation pattern preceding the breakout, or the size of the move preceding the consolidation. The 10-month triangular pattern, which occupied the latter two-thirds of 2006, implied a 35% move from the breakout point — from $650 or $700 in this case. That suggests a target price between $875-945 for this move. But a repeat of the sort of run that occurred in 2005-06, which is possible, would extend that target to about $1,090.

“I know it’s hard to put faith in the tea leaves. They are just a tool. Sometimes they don’t help very much. But they have served my forecasts relatively well for many years — and they do work for gold too, usually. My personal feeling is that we’ll see gold peak at the 1980 high, and then fall back 50-75 points this year, before lunging at four-digit territory (i.e., above $1,000).”

Luckily for you, Byron King has found a way to buy gold for pennies an ounce… which you can learn about here.

Also worth noting, silver has soared beyond the $14.85 pennant top we reported to you Monday. It has since skyrocketed through $16, retreated slightly, and currently trades for $15.70.

Thusly, silver finally enters 26-year highs of its own. For what it’s worth, when silver last broke through a similar pennant consolidation in late 2005, prices doubled in five months. Don’t forget, if you’re looking to benefit from a possible silver price explosion without market exposure, check out EverBank’s MarketSafe Silver CD.

Oil prices also responded to the increasingly weak dollar, rallying as high as $98 this morning. $100 oil… please… it’s in the bag, baby.

“Do I think $100 is the ‘top’?” asks Resource Trader Alert’s Kevin Kerr. “Not by a long shot. I fully expect that $90 is the new baseline and the accurate crude price is more like $150 right now and looks like $200 by end of 2008. Throw in another terrorist attack on Saudi or American oil terminals and you can move that timeline forward six months. Can the economy survive with oil at $100 and gasoline at $5? Sure, it can. Most of Europe, including where I have a home in Estonia, are subject to gasoline that is about $7-8 per liter.

“I for one welcome $100 oil with open arms,” continues Kevin, perhaps in a manner more optimistic than your faithful editors. “It could be the flashpoint that reignites the American entrepreneurial spirit to extricate ourselves from our addiction and do what we do best, innovate and overcome.”

Don’t forget… The Energy and Scarcity Investor launches this Friday. Stay tuned…

“For the first time ever, investors consider Brazilian government bonds safer than Merrill Lynch bonds,” writes Eric Fry. Yesterday’s news of a certain Brazilian supermodel ditching the dollar must have pulled Mr. Fry’s attention away from New York and toward South America.

“According to the relative pricing of credit default swaps (CDS) on Brazilian government debt versus Merrill Lynch debt,” Fry notes, “the reeling American brokerage firm is a riskier credit that the resurgent Latin American economy.

“Buying five years of protection against a Brazilian default used to cost much more than buying five years of protection against a Merrill Lynch default.

“But now that Brazil has become as crisis free as the U.S. financial sector has become crisis prone, CDS prices have flip-flopped. Merrill CDS prices have jumped above those for Brazilian government debt! In other words, CDS buyers consider a Merrill Lynch default more likely than a Brazilian default.

“Maybe CDS investors have got it all wrong…or maybe the U.S. finance sector is in much deeper doo-doo than most investors believe. The ‘doo-doo’ interpretation seems more plausible.” For more on the subject (including another shameless photo of Gisele in a Victoria’s Secret runway shoot), reread your daily Rude Awakening here.

We noted with irony yesterday that the “committee” of economic players who cleaned up essentially every crisis since 1990 were being called to action to “fix” the subprime fallout. Well… add this name to the list: Richard Stuckey.

Stuckey, the man once tasked with unwinding the LTCM crisis, has been appointed the head of Citigroup’s new “Subprime Portfolio Group.” Citi created this group on Nov. 4 after it admitted as much as $11 billion in additional write-downs. Stuckey will try to assign value to the subprime assets on Citi’s books. Some estimates put those troubled loans in the $43 billion range.

The U.S. stock market enjoyed a rare day in the black yesterday. The benchmark indexes rose about 1% each. Energy and material sectors led the way, with over 2.5% gains each. Positive reports from Time Warner and Microsoft helped kick-start the buying.

The former largest automaker in the world, GM, announced a staggering $39 billion loss in the third quarter. Shares fell over 5% in premarket trading after the U.S. automaker revealed the second largest quarterly corporate loss for an S&P 500 company…ever.

GM attributed the losses to a somewhat complicated charge involving unused tax credits, as well as mortgage losses from its since divested financial arm, GMAC.

“This loss is an admission by GM,” explains our in-house CFA and editor of Strategic Investment Dan Amoss, “that it isn’t likely to earn the tens of billions in profit that would make the tax credits useful. Deferred tax assets only have value for companies with profitable futures. It shouldn’t be surprising, but this news does come as a shock to GM stock fans, who have been bidding it up on hopes that sustainable profits will one day return.”

The company was happy to report, however, that without these “special items,” it managed to lose only $1.6 billion last quarter.

Mortgage application volume fell 1.6% last week, according to this morning’s Mortgage Bankers Association report. Of all the most recent mortgage applications, almost half were refinance applications. The MBA’s application index now stands at a score of 670, down a tad from 2003’s high of 1,856.

100 is the benchmark for the index. It represents the application volume in 1990.

Michael Jackson, the “King of Pop,” is on the verge of having the Neverland Ranch foreclosed. Apparently, the freak has defaulted on a $25 million loan.

Jackson’s loan was secured against the deed of trust for his 2,800-acre “private amusement” park. He has 90 days to fork over the $25 million or the ranch will be property of Delaware loan firm Fortress Music Trust.

Already tied up by multiple lawsuits and other loans, many speculators believe that Jackson won’t be able to keep the ranch, and might even declare bankruptcy. Sigh. If you have young children, you can rest a bit easier now.

“I do not understand: Why didmy shares of PetroChina go down $32.96 a share today, given that report on how well it’s doing?” asks a reader. PetroChina’s market cap more than doubled on Monday after its Shanghai IPO… but prices fell here in the U.S. and in Hong Kong.

“So it is difficult to know what the market price of PetroChina really is. I’d throw out the Shanghai price. It’s an artificial market — Chinese investors can’t invest significantly outside of China, for one thing. And foreigners can only invest small amounts in certain shares. I think the bigger and more liquid Hong Kong market price is the best market price.”

Another reader sent this nugget from The Associated Press in response to a reader’s comment that he went to the Canton Fair in Guangzhou and found it void of Americans importers:

“Australian officials ordered a popular Chinese-made children’s toy pulled from the shelves after scientists found it contained a chemical that converts into a powerful “date rape” drug when ingested.

Three children have been hospitalized over the past 10 days after swallowing beads from Bindeez, named Australia’s toy of the year at an industry function earlier this year.

“The beads in the toy, sold by Australia-based Moose Enterprises, are arranged into designs and fuse together when sprayed with water.

“Scientists say the beads contain a chemical that the human body metabolizes into the so-called ‘date rape’ drug gamma-Hydroxybutyric acid. When eaten, the compound — made from common and easily available ingredients — can induce unconsciousness, seizures, drowsiness, coma and death.”

The 5 Responds:
Hmmmn… what are they building over there?

Best Regards,

Addison Wiggin
The 5 Min. Forecast

ADDITIONAL RESOURCES
Dollar Slumps to Record on China’s Plans to Diversify Reserves
Silver hits its highest mark since 1981
Michael Jackson defaults on $25m loan
Australia pulls ‘date rape’ drug toy

• Fortunes await the wise during stock market’s “biggest challenge” since 2000-2001
• Citi’s troubles just beginning… Why the words “level 3” might soon be infamous
• Gold busts through $820… but one major investment bank calls for $750 by 2008
• Oil traders’ eyes on Mexico… Diesel’s all-time high… Jet fuel propels rising airfares
• Ron Paul sets a record of his own… even professional wrestlers support the good doctor

The more things change, the more they stay the same.

On Feb. 15,1999, then Treasury Secretary Robert Rubin participated it what we may call the most wildly arrogant cover Time has ever published:

Rubin, Greenspan and Summers: The Committee’s work is never done

Apart from the obvious hubris of this cover, we include this picture because we are students of irony.

As you know, Rubin has been called on again… this time to save Citigroup from its exposure to subprime lending. Rubin will temporarily replace the rapidly departing Chuck Prince as CEO.

And what a mess he will face. According to a MarketWatch article, Citigroup now holds over $134 billion in what it calls “level 3 assets.”

“Level 3” is Citi’s most frightening valuation of assets. From its own 10-Q filing with the SEC: “Level 3 — Model derived valuations in which one or more significant inputs or significant value drivers are unobservable.” (Citi added the emphasis, not us.)

In other words, Citi owns “$138 billion in assets” void of any reliable price, because no one is crazy enough to buy them. The last time we heard talk like this was when Bear Stearns told its fund’s investors that its assets were literally worthless.

The subprime debacle is just another in a long line of ‘liquidity’ crises that define Rubin’s post-’80s career. He talks candidly about them — Mexico, 1994; South Korea and the Asian Contagion, 1997; Russia and Brazil, 1997-1998; LTCM, 1998 — in his book In an Uncertain World, in the documentary Commanding Heights and in the interview we did with him for our own upcoming book and documentary.

The irony: When the Time cover was published, the Committee to Save the World and the editors of Time thought they were out of the woods. The U.S. stock market collapsed a year later. And the rest is recent history. Welcome back, Bob. As the Chinese say, “May you live in interesting times.”

Citigroup’s barrage of bad news pulled the U.S. markets down about 1% by early afternoon yesterday. Traders recovered a bit by the closing bell… but the Dow lost 0.4%, while the Nasdaq and S&P 500 fell 0.5% each.

“In the unwinding of the mortgage bubble, the stock market faces its biggest challenge since the unwinding of the tech bubble in 2000,” writes Chris Mayer this week to his Capital & Crisis subscribers, echoing our own sentiments. Greenspan went on record in early September saying he thought this episode would go down in history as one of the greats along with the 1837 and 1907 banking crises.

But it’s not all bad. “Painful as it may be in the short term,” Mayer cautions, “markets like these carry the seeds of fortunes. Think if you could roll back the clock to 2000 and 2001 and you knew what you know now. You’d make a bundle. You’d be beside yourself with giddiness about how much money you’d make.

“The point is that even in that tough market, there were lots of things to buy. There are surely such winners-in-waiting in today’s stock market, too. We just have to find them.” Chris has packed the C&C portfolio with a litany of such goodies. You can find them here.

Yesterday’s drama in the stock market fueled another sell-off for the dollar. The greenback fell against all 16 actively traded currencies yesterday. Amid the carnage, the euro set another record high by digging a tad deeper into the $1.45 range. Likewise with the pound and yen, both furthering their distance from the dollar in their respective $2.08 and 114 handles. The loonie ticked up to another new high of $1.08.

And surprise, surprise… the dollar index struck a new all-time low this morning… 76.0.

Gold soared to fresh 27-year highs overnight. In Hong Kong and London, gold rocketed up a staggering $15 and currently trades around $822 for immediate delivery.

Analysts at UBS upgraded their one-month forecast to $850. “With the two external drivers of gold, a weak dollar and strong oil, together conspiring to lift the metal higher,” said UBS analyst Robin Bhar, “we are now in range of a move to the all-time nominal high.”

But what then? “Assuming that $850 trades,” says Bahr, “a scramble for upside could see gold push higher still. But one thing is sure, once the dust settles, gold will likely correct sharply lower.” UBS’ three-month forecast for gold remains the same — $750.

In the economy, U.S. service industries grew at a faster pace in October than in the previous month says the Institute of Supply Management. The ISM’s index of nonmanufacturing businesses rose to 55.8 from 54.8 in September, defying analyst expectations of a drop to 54. Like the ISM’s other indexes, any score over 50 indicates growth within the charted industry.

Nonmanufacturing businesses now make up nearly 90% of the U.S. economy.

Beazer Homes and Hovnanian Enterprises, two of the biggest homebuilders in the nation, both revealed troubling preliminary earnings figures today.

Beazer disclosed that year-over-year home closings fell 39% in its fiscal fourth quarter. New home orders fared even worse, falling 53% over the same time period. The company announced today that it would be forced to cut 25% of its work force, about 650 jobs, and also suspend dividends for shareholders.

Hovnanian barely fared better this morning when it announced similar setbacks. The homebuilder said home sales were down 19% year over year during its fiscal fourth quarter. Net contracts fell as well, down 10%. During the same time, cancellations amounted to 40% of gross contracts… yikes.

Light sweet crude, which retreated after striking the record high of $96, is back up to $96. On the heels of an “output suspension” by Petroleos Mexicanos, Mexico’s largest oil company, most traders expect a disappointing Energy Department inventory announcement tomorrow. The general assumption is that without Mexico’s help, the U.S. will struggle to maintain inventories.

Last week, the inventory report shot crude futures up $4 per barrel. Look for tomorrow’s report to do the same.

And we’ve got a new fuel topping the “all-time” list. Diesel fuel prices hit an all-time high this morning. With a national average price of $3.30 per gallon, diesel has never been so expensive — even adjusted for inflation.

Prices for both unleaded and diesel each rose about 14 cents last week alone. Unleaded prices, at an average of $3.01, are about 20 cents short of their own all-time high. In October, prices rose an average 25 cents per gallon across the nation.

Rising fuel prices have finally caught up with the airline industry. American Airlines has announced a $20 fare increase on all U.S. round-trip flights. The airline cited rising oil prices as the sole driver behind the hike.

AA’s hike comes on the heels of almost every major airline hiking prices in October. Continental, Delta, Northwest, US Air, United, AirTran and Alaska Air have all hiked prices by a similar margin.

And who can blame them… American Airlines recently told the LA Times that a 1 cent/gallon increase in the price of jet fuel adds $30 million to its annual expenses. Officials at American also guessed that the rise in crude oil prices since “the summer” will cost the company more than $1 billion.

Last week, the Air Transport Association estimated higher fuel prices drove second-quarter costs up 5.6%… double the expense that airlines suffered the same time last year.

We’re putting the finishing touches on a new investment service we’re calling Energy & Scarcity Investor. In it, you’ll find investments that are most likely to soar in this age of rapidly increasing energy demand… and dwindling resource supply. Your first shot at the service comes this week: Friday. Look for it.

Presidential candidate Ron Paul raised an impressive $4.2 million yesterday, the biggest single-day funding for a Republican candidate ever.

Funding for Paul was almost entirely derived from this site, which we mentioned to you yesterday. Paul supporters wished to commemorate Guy Fawkes Day by boosting the Ron Paul revolution with a massive funding drive.

Only Hillary Clinton and Barack Obama have ever amassed more campaign funding in a 24-hour period.

And we couldn’t resist adding this nugget… one of Paul’s biggest supporters is professional wrestler Sean Morley. By day, Morley plays the character of a porn star turned WWE wrestler named Val Venis.

Val executing his signature finishing move… “the money shot”

But by night, Morley is, well, a big fiscal nerd not unlike your editors. He pens a blog called The Freetarian, where he giddily endorsees Ron Paul, maintains a national debt clock and records liberty-focused podcasts.

“Back when ‘Japan Inc.’ was on the rise,” a reader reminisces in light of our coverage of the rapidly ascending Chinese economy, “a friend of mine was the manager of a foreign company’s office in Asia. Being a single young fellow, he was a regular frequenter of the local clubs. One evening while enjoying the company of a bevy of young ladies, he excused himself momentarily. On his return, the ladies were all gone. Later, when the manageress passed by he asked her what had become of the girls. She replied, ‘While you were away, some Japanese came in and, well, the girls know you white guys don’t have any money.’ Now there’s a rude awakening.

“Sadly, I fear a new generation of Americans will now feel that sting. Riding high today, shot down tomorrow.”

Regards,

Addison Wiggin
The 5 Min. Forecast

ADDITIONAL RESOURCES
Ron Paul Raises More Than $4.2 Million
The Freetarian
Citigroup: $138 billion in Level 3 Assets
American Airlines leads airfare hike