• The cyclo-cross illustrates our quickly crashing market
• Sovereign wealth funds giving up on their rescue attempts
• China creates its own $586 billion stimulus
• Greg Guenthner talks about “low” oil prices…and short-term opportunities
• Restructuring the AIG bailout plan

• Consumers ready to tap out? A compelling chart reveals an undeniable development
• Government reports net job loss in February… how today’s report nearly guarantees recession
• Which two U.S. financial powerhouses got hit hard this week… and what it means for the market
• Another American housing milestone… homeowners in worst shape since World War II
• Plus, more on the Bernanke subprime bailout… could the “PESO” be the answer?

Consumer confidence has dipped to a five-year low so far this March.

According to the RBC CASH Index — a measure of Consumer Attitudes and Spending by Household — confidence among consumers has sunk to 33 this month, steeply down from 48 in February and its lowest reading since inception in 2002.

Jobs took a hit this morning, too. U.S. nonfarm jobs fell by 63,000 last month, the Labor Department reports. January numbers got revised down, too… from minus 17,000 jobs to minus 22,000.

That’s an “official” two-month, back-to-back loss in jobs. Worth noting, because in the past 40 years, there have never been two consecutive months of job losses that didn’t coincide with a recession.

Still, as usual, the government stats are confusing. Somehow, despite the net loss of 85,000 jobs over the past two months, “unemployment” has improved to 4.8%, up from 4.9% in January and 5% in December. Hmmmn…

Ten minutes before this morning’s jobs report, the Federal Reserve announced it’d be injecting $100 billion into the U.S. banking system. The Fed will print an extra $20 billion for both of its term auction facilities held this month on the 10th and 24th. Each will now inject $50 billion in the embattled financial industry, for a monthly total of $100 billion.

Immediately following the Fed announcement and jobs report, traders in Chicago priced in 100% odds of future Fed cuts of 75 bps.

Naturally, within seconds, the dollar tanked. The dollar index pierced the 72 barrier for the first time in history, sinking to another record low of 72.6. The euro popped to a new all-time high of $1.54. The yen shot up to a fresh three-year high of 101. The pound is back to $2.01.

Gotta love the Fed, eh? Stalwarts of price stability. Mmn. Love ’em.

Stocks in the U.S. sold off steadily all day yesterday. While much of this week was marked with up-and-down volatile trading, the mood on the Street Thursday was oppressively bearish:

For the day, the Dow shed 1.7%. The Nasdaq and S&P 500 dropped 2.2% apiece.

For the year, the Dow is now down 9%… the S&P 500 is off 11%… and the Nasdaq is creeping toward 16%.

Carlyle Capital, a publicly traded affiliate of the Carlyle Group, said today it is experiencing the same default notices and margin call woes as we reported Thornburg Mortgage as having yesterday.

Lenders have begun liquidating securities from Carlyle Capital’s $21 billion portfolio. The group claims losses from its mortgage-backed portfolio have left it unable to repay its debts. Carlyle Capital’s shares, which trade in Europe, fell 60% yesterday.

We mention this for two reasons. One — another seemingly safe investment group is biting the dust. Two — the Carlyle Group is one of the most powerful, globally connected private equity joints on the planet. We can’t help but think that if it couldn’t dodge this bullet, no one can.

Standard & Poor’s cut the credit rating of Washington Mutual yesterday. WaMu, the U.S.’s largest savings and loan, now rests on the lowest rung of investment grade credit ratings, BBB.

“We now believe that the severity of losses on all residential mortgages will be higher,” said an S&P spokesperson, “and that the weak housing market will now be a longer cycle.”

WaMu stock fell 7% on the news and is now down over 60% in the past two quarters. This morning, The Wall Street Journal leaked news the bank is aggressively seeking injections from private equity firms and global sovereign wealth funds.

Chuck Prince, Stan O’Neal and Angelo Mozilo will all be appearing before the House Committee on Oversight and Government Reform today. The two former CEOs of Citigroup and Merrill Lynch and the current head of Countrywide have all been ordered to Capitol Hill today.

Lawmakers, they say, are interested in hearing how the three CEOs managed to pocket fortunes as their organizations collapsed and the stock market reeled. Specifically, why the three companies lost a collective $20 billion in 2007, yet their three CEOs took home over $321 million in compensation and stock.

There’s something wrong with this picture, isn’t there? Shouldn’t Congress be looking into its own financial habits first… before going after these yahoos?

Oil stayed steady yesterday and overnight right at its all-time high of $105. Likewise, gold has held steady at $980.

We’ve posted a couple of interviews Kevin Kerr and Byron King have done recently with Fox News and CNBC on the Agora Financial web site. If you’re interested in seeing these gentlemen in action, they’re discussing the state of the economy, historic oil prices, the dollar on the skids and record-high commodities prices. Check it out…

Curiously, despite the dollar’s historic bender… and record price levels for everything from oil and wheat to gas, tuition and health care… consumer spending appears to be holding steady. Wal-Mart and Target posted better earnings in February than anyone expected. You know what they say: When the going gets tough, the tough go shopping.

In turn, this next item should come as no surprise to you: For the first time since World War II, the average American homeowner’s debt exceeds the equitable value of their home.

According to a Federal Reserve study released yesterday, the percentage of equity in U.S. homes has fallen below 50% for the first time since 1945. Homeowners’ percentage of equity slipped to 47.6% in the fourth quarter. The Fed began tracking these equity numbers in 1945. Odds are this is the worst reading since the Great Depression.

Moody’s recently estimated, too, that 10.3% of all homeowners will have zero or negative equity by the end of the month.

And here’s a curious development: Remittances to Mexico — money sent back to Central America from immigrants working in the U.S. — dropped 6% in January, the biggest fall in 13 years.

The Bank of Mexico reports this morning that remittances fell to $1.65 billion in January — down about $10 million from the month before. The bank attributed the massive drop to recent changes in migration policies and a sizeable decline in U.S. construction activity, which accounts for 20% of jobs for Mexicans living in the U.S.

For what it’s worth, such remittances comprise 3% of Mexican GDP and are the second largest source of foreign currency flowing into Mexico.

Meanwhile, across the planet, the number of billionaires in India and China doubled. Billionaires with a “B.” In India, there were a “mere” 36 billionaires in 2006. Today, there are 53. Same story in China… up from 20 in 2006 to 42 today.

Yesterday, we mentioned Mr. Buffett had regained his title as the world’s richest man. Today, we note another, perhaps far more important facet of Forbes’ annual study: Four Indians have made it to Forbes’ list of the top 10 richest people on the planet, the most of any nation. Indians occupied Nos. 4,5,6 and 8 this year. Especially noteworthy was K.P. Singh… the mega-rich Indian’s riches tripled in 2007, to $30 billion, enough to garner him the No. 8 spot.

If you haven’t checked out Chris Mayer’s recent report on investing in India… it’s a must-read. Click here for three ways to play the market that’s making Indians richer every day.

“I couldn’t agree more with you guys,” says a reader in response to our cordial discussion of the Bernanke mortgage crisis bailout plan. “As a real estate broker, it made me sick to see all of the cheap money out there and the ease with which people qualified for loans.

“The Fed needs to stop bailing the private sector out. I agree with Mr. Bonner, people get what they deserve. It’ll be tough, but it is time for people in this country to start taking responsibility for their actions, and it is time for the Fed to stop trying to be like Underdog (‘Here I come to save the day’).”

“I have been a mortgage banker for 34 years,” says another reader, “and say let the mortgage mess unravel without any government intervention. Real estate does not always go up in value, requires significant annual monies to maintain and must be held long term to realize a gain. Your home is shelter, not an investment. We all have to live somewhere.

“The people asking for solutions are the realtors, lenders and counties that are trying to protect their incomes by having the homeowner pay more than they should for housing. They sponsor the counseling agencies for the consumer where foreclosure or bankruptcies are not offered. Foreclosure and bankruptcy are solutions to this dilemma, both locally and federally, and are actual consumer rights. They do not prevent one person who takes this route from continuing to rent or own their next home at a lower cost.

“The FDIC did not do its job in following its regulations or conducting on-site audits of major banks. This is identical to FSLIC in the 1980s. All taxpayers will pay a terrible price for their repeated stupidity on trusting their government. They have also been given a lesson that Wall Street is never to be trusted. What is sad is that this will all be forgotten in 10 years… and it will happen again.

“We recovered very nicely from the foreclosures of the 1980s and will do so again.”

“The banks had willing partners in the real estate Ponzi,” notes another reader, “so where are the suggestions that realtors bail their clients out by giving back the massive commissions they booked as the bubble inflated?

“Some people saved money all this time. Some people shorted housing/financials last year and are still short and strong. These people will use some of those massive gains to buy homes once the prices are reasonable (another 20% lower or so, minimum). Then the wannabe no-money-down real estate tycoons that were booted out of their homes (sorry, I mean the banks’ homes) can surely find places to rent at reasonable prices from the new owners. That, too, is the natural order of things.

“I’m only in my 30s, but even I already know that history repeats. This market and real estate cycle is nothing new. To those who don’t like it, I ask that if you’re not going to profit from it or pick up good deals, at least stop whining. Seems to me, with these bailout ideas floating around the government, we’re going to lose the war against inflation and communism all in one move.”

“Here’s an idea,” our last reader suggests. “The banks forgive part of the principal and in return they receive a like percentage share of the equity. Forgive 10% of the principal and own 10% of the house. This wouldn’t help them raise any cash, and the house sale could be years off. So maybe they could aggregate all their equity shares and then sell them to investors. They could call these, say, “Phantom Equity Securitization Obligations,” or PESOs” for short.

“Now, what could these investors do with their new PESOs? Maybe they could sort of dice them up into differing quality levels and sell some sort of pieces of them. They could have say, three different levels and sell their “Pieces of Three,” or POT, shares.

“And on and on we could go.”

The 5: Heh. Now we’re talking.

Cheers,

Addison Wiggin
The 5 Min. Forecast

P.S. Kevin Kerr and Byron King are more than just television personalities. They also steward a significant portion of the trading gains being enjoyed by your fellow 5 readers:

In recognition of their efforts and your commitment to successful trading and investing in what we expect to be a multiyear bull market in natural resources, we’ve assembled a stellar offer for you this month. If you plan to make money investing over the next decade, you can’t do any better than to follow the advice given by these two gentlemen:

Wanted: Aggressive, Wealthy and Tight-Lipped Agora Financial Reader

• Home prices fall at record rate… which markets sunk the lowest
• Consumer confidence plummets… “future expectations” reach 17-year low
• Producer inflation soars to 7.4%… Kevin Kerr on why the worst is yet to come
• Dollar crashes to all-time lows… one price wild enough to “mark your calendar”
• Commodities go through the roof… record highs for gold, silver, oil, wheat and more!
• Plus, more pain in the banking sector… one great reason why you shouldn’t let it bother you

Home prices in 20 major U.S. metropolitan areas fell in December at a record rate, says the latest S&P/Case-Shiller home price index. The index fell 9% year over year in December, according to the index published yesterday.

In the 20-year history of the index, it’s never been this bad:

“We reached a somber year-end for the housing market,” said Robert Shiller, steward of the index. “Wherever you look, things look bleak, with of 20 metro areas reporting annual declines, and the remaining three reporting flat or moderate growth rates… 14 of the metro areas are also reporting record lows and eight are in double-digit decline.

Miami, Las Vegas and Phoenix topped the “worst of the worst” list, with declining annual growth rates of up to 17.5%.

And to add insult to injury… consumer confidence fell to a five-year low in February. The Conference Board’s index fell to 75.0, down from 87.3 the month before. Not since the start of the Iraq war have U.S. shoppers been more dismayed by their financial prospects.

In fact, according to the release this morning, perspective on “future expectations” hit its lowest level since 1991. “Current situation” confidence isn’t much better… it’s now at a seven-year low.

Inflation, too, is hitting the headlines… Producer prices inflated at a breakneck rate of 1% in January, says the Labor Department this morning. Year over year, producer inflation is up 7.4% — the worst rate of inflation since 1981. Core PPI rose 0.4%, also beating Wall Street estimates.

“None of this comes as any real shock,” says Kevin Kerr. “After all, we’ve all felt our wallets shrink a little more each week as gas and food prices take a bigger and bigger bite out of our incomes. Many ‘experts’ say that these high prices can’t last — I disagree.

“Commodities across the board are hitting all-time record prices. Everything from coffee to crude, gold to wheat is making new highs. In fact, wheat has been in such a record rally that the exchange had to officially expand the limits on the futures contract, and it’s still trading limit up.

“Consumers are faced with starting to have to make tough choices and also foregoing certain things that in the past would not have been an issue. While this may begin to dampen demand for certain commodities, we’re not seeing it yet.”

And yet… the Fed announced it had auctioned off another $30 billion in loans to cash-strapped banks yesterday.

In the sixth “term auction facility,” the Fed gave away money at 3.08%, the lowest rate of any auction since the Fed began the practice in December. If you’re keeping score at home, that’s at least $160 billion in freshly printed liquidity pumped into the financial system since the end of 2007.

Ben Bernanke testifies before Congress again today. If members of the House have their wits about them, they’ll nail him with this PPI number.

Yeah, like that’s going to happen. Heh.

So… given all that good news… this should come as no surprise to you: Mark your calendars — Feb. 27, 2008… euro: $1.50.

The euro traded for about $1.48 when we wrote to you yesterday. But as you can see, a flurry of bad data pushed the lowly greenback into record territory. The dollar index is looking all-time ugly too… down to a record low of 74.2.

But really… you had to see this one coming:

All the world’s tradable currencies rallied against the greenback overnight. The pound is up to $1.98. The loonie is a hair short of $1.02. Yen’s at 106. Peso, rupee, real… pick a currency… it’s up against the dollar this morning.

Even the Iraqi dinar is up on the greenback. It’s now worth 82 hundredths of a cent.

The spot price of gold hit another record high this morning — up to $965 per ounce. Gold had pulled back as low as $925 yesterday, but then rallied 40 bucks to its new all-time high.

Gold managed to drag its precious brethren to new highs, as well. Silver shot up almost a full dollar, to a record high of $19.43 per ounce. Platinum prices, which have nearly doubled since the start of 2007, jumped 20 bucks, to a fresh high of $2,166.

Had your fill of all-time highs for one day? One more and then we’re through… oil prices set a record high of their own yesterday — $102 per barrel. Like gold’s spike, oil’s rise can be mostly credited to an ever-weakening dollar.

Wheat finally backed off its recent high yesterday. Bushels in Chicago lost $1.35 to a closing price of $10.79.

Wheat had surged an incredible 17.5% in the last four days alone, the biggest four-day run since 1999, striking a record price of $12.89 Monday. But prices retreated yesterday on news of better-than-expected wheat planting intentions from the USDA.

However, in after-hours trading, we’re already seeing wheat futures back up in the $11 range.

Luxury homebuilder Toll Brothers handed its shareholders another dreadful quarterly earnings report this morning. The builder posted a net loss of $96 million in the first quarter, with pre-tax write-downs of $245.5 million and a 23% decline in year-over-year revenue.

“Ceaseless talk of a recession continues to dampen the mood of consumers in general, whether or not a recession actually occurs,” grumbled Robert Toll, chairman and CEO. Toll is “not yet seeing much light at the end of the tunnel,” he later admitted.

Strategic Short Report editor Dan Amoss recommended shorting a competitor of Toll Brothers in his alert last week. According to Dan, this homebuilder not only is neck deep in the worst housing markets in the country, but also has sizable positions in the infamous mortgage-backed securities market.

You can learn about Dan’s latest short — which is still below his “buy price” — by subscribing today. Don’t forget, our offer for three free months of Strategic Short Report ends tonight. Click here to give it a try.

UBS officials spent today begging shareholders to allow a $12 billion sovereign wealth fund injection.

The Swiss bank normally pulls in some 2,500 heads for its annual get-together. But 2007 was a “special” year for UBS. $18 billion in annual subprime losses, the first annual net loss in the bank’s 150-year history… and this morning, shares were down over 50% from their 2007 highs.

No mystery then why it’s standing room only in the 7,000-seat arena hosting today’s annual UBS shareholders meeting.

The major task at hand in today’s meeting is a vote on the $12 billion in proposed bailout injections — most of it from Singapore’s Government Investment Corp., with a couple of billion bucks from the crowd fave, “unidentified Middle East investor.”

Another banking crisis could kill thousands, warns the Financial Times this morning.

Literally.

According to a University of Cambridge study, the average “systemwide” financial crisis over the last 40 years has increased deaths from cardiac distress by over 6% in wealthy nations… and even more in developing countries.

In a case study examining the contemporary banking crisis, Cambridge researchers estimated up to 5,130 souls would leave this world should “a significant proportion of banks” suffer a crisis similar to that of Northern Rock’s last fall.

The researchers interviewed folks in what appeared to be a rather tame “bank run” at the Rock last year. As is turns out, some of those in line were experiencing intense stress… similar to the unease experienced in natural disasters or terrorist incidents.

So… when the s&^% hits the fan in 2008… take it easy… have a glass of wine. Chill out.

“I can’t see any benefit for the U.S. economy in stealing money from consumers or taxpayers,” says one reader, “by any form of regulation to subsidize inefficient U.S. versions of lower-cost foreign industry. Jobs will go where the production and business efficiency is the highest and the ideas of the local entrepreneurs are the best.

“The U.S. can’t provide either of those by banning anything. The export of jobs isn’t going to help anyone. The corollary in your Baltimore example, banning the import of streetcars and dome supports, wouldn’t have helped the Clipper Mill survive in a world where nobody wants streetcars or dome supports!”

The 5 responds: Not that we’d be interested in building anything else… but who said those imports were banned?

“True wealth is created only by ‘added value,’” adds another. “This comes about by converting materials into something that becomes an object that is purchased by the buyer to satisfy a want. This is carried out by the manufacturing industry. By moving this function offshore, we are eliminating the creation of wealth generation.

“The service industry produces no added value, but only moves money around. The only increase in currency volume is government controlled and does not ever generate added value (wealth), but causes nothing but inflation by making the dollar worth less and less due to dilution.

“Until we regain the manufacturing industry in our countries, we cannot increase our overall standard of living for the general public.”

“I was surprised by Kevin Kerr’s suggestion to take profit on silver,” writes our last reader. “What do we know about silver? Historically, its ratio to the gold price is roughly 18-to-1, which indicates that silver would be fairly valued at about $50 in today’s world. According to one of the foremost silver analysts, Ted Butler, there is less physical silver on the ground today than there is gold. Also, silver has many more industrial uses than gold, which implies that silver will be consumed at a greater rate than gold.

“These factors could create a shortage in silver, making the current run look modest at best. I would argue that now may be a good time to buy more silver. Thanks for all of the great work at Agora, and specifically with The 5.”

The 5 responds: We spoke with Kevin on this matter at our meeting yesterday. Along with the rest of the editors, Kevin thinks that silver’s got plenty of room to rise from current levels. His advice was only to grab some profits now while you can… we suspect he’ll be buying back in on the dips.

Cheers,

Addison Wiggin
The 5 Min. Forecast

• Trade deficit soars… how the latest reading is all the more remarkable
• Moody’s threatens to downgrade U.S. credit rating… Mayer on how the loss would be “far from symbolic”
• Bernanke speaks… equities, currencies and commodities react. Details below…
• Countrywide’s big bailout… World’s biggest bank to the rescue
• Plus, the $2,500 that might just change the world…

The U.S. trade deficit widened by a greater-than-expected margin yet again in November, the Commerce Department reported this morning. U.S. trade deficit rose by $63 billion, over $5 billion more than expected by economists.

That’s a 9% jump from the last month — the highest level since September 2006. Much of November’s deficit rise was attributed to record high oil prices — up 53% year over year.

The annual trade gap through the end of November swelled to $650 billion.

This huge deficit is made all the more remarkable by one fact: The U.S. has also enjoyed the ninth consecutive month of record high U.S. exports. Arthur Laffer and a slew of neocon economists would argue that growing exports and an expanding deficit are both symbols of economic prowess.

“The U.S. credit rating is at risk,” reports Chris Mayer this morning.

Citing a Moody’s report yesterday, Mayer suggests what we’ve tried diligently to document in our documentary. According to Moody’s, unless the U.S. can curb booming health care and Social Security spending, it could lose its AAA credit rating by 2017. If the government were to lose the ranking — which it has held since 1917 — confidence in the U.S.’s ability to pay back debts will be seriously damaged, and the U.S. economy could face a ginormous slowdown.

“When I read stories like this, it makes it harder than usual to stomach election-year politics. Is anyone paying attention to how much the government spends? Maybe with the market tanking, people will start to think about money again… and look less graciously on those who spend it so carelessly.”

“We stand ready to take substantive additional action as needed to support growth and to provide adequate insurance against downside risks,” said Fed chairman Ben Bernanke in prepared remarks yesterday. While Bernanke reiterated that the Fed does not believe the economy will slip into recession, few could disagree that this was his most bearish outlook to date.

And for what it’s worth, “substantive additional action,” was completely interpreted by Wall Street as at least a 50 bps rate cut. Futures listed on the Chicago Board of Trade now price a 92% chance that the Fed cuts by 50 bps on Jan. 30.

Bernanke’s comments saved the market yesterday. Within seconds of the breath leaving his yap, the Dow recovered from 100 points down… and ended the day 1% higher. Wall Street sure loves an accommodating Fed chairman.

Another bit of news helped spur the rally, too. Bank of America will buy Countrywide for $4 billion, or about 7 bucks per share, the bank confirmed this morning. By acquiring Countrywide’s portfolio of mortgages, BoA will become, by far, the biggest mortgage lender in the country. According to third-quarter origination stats from MortgageDaily.com, the bank now controls $142 billion in home equity financings. Wells Fargo takes second place, at $68 billion.

Merrill Lynch will announce an additional $15 billion write-down in its earnings statement next week, reports The New York Times. Even the bravest of Wall Street analysts had predicted no more than $12 billion in additional fourth-quarter write-downs for the bank. Don’t be surprised when Merrill announces worse-than-expected fourth-quarter losses as well.

Currency traders heard Bernanke’s speech too… and sold the dollar off in droves. The dollar index, seemingly on the verge of a small rally, fell off a cliff:

Aided by the European Central Bank’s decision to hold rates steady, the euro marched from $1.46 back to $1.48. The yen crept up to 108. Even the Swiss franc enjoyed the ride… it’s heading toward parity with the U.S. dollar too. Currently, the creamy chocolate franc trades for 91 cents.

The pound has broken ranks with the dollar entirely.

Since November, the pound’s gone nowhere but down, falling a dramatic 16 cents in about two months. As our friend Chuck Butler put it in today’s Daily Pfennig, the pound “has been beaten like a rented mule lately.”

 

Gold saw the last visible effect of Bernanke’s comments yesterday. Speculators drove the spot price as high as $897… it has since steadied, trading between $890-895.

Indian automaker Tata unveiled the Nano yesterday, quite possibly the world’s least expensive car. For a about $2,500 bucks, this beauty could be yours:

Labeled “the people’s car,” the Nano will be made and produced almost exclusively in India. Tata estimates seven of every 1,000 Indians own a car. With 1.1 billion people in the country… looks like the market could be huge.

Make no mistake, Indians will get what they’ll pay for… the Nano comes equipped with a 0.6 liter engine, a top speed of 60 mph, no air bags, no passenger-side mirror, no power steering, no radio, no A.C. and one windshield wiper.

Tata plans on making 250,000 Nanos by July 2009, and if successful, plans to market the car in Latin America, Southeast Asia and Africa. In a related note, Tata is also a leading candidate in line to take Jaguar and Land Rover off Ford’s hands. Heh… interesting times.

We’ve been in and out of Tata a few times for good money. With this news hitting the major media and the Indian market as frothy as it is, we’d be wary of buying again right now. But it’s definitely a stock worth watching.

“Beats me,” writes a reader, “why any firm would want to pander to Tony Blair’s vanity and egomania by employing him part time to the tune of a (reported) $500,000 per year. Doesn’t JPM have enough so-called experts?”

The 5 responds: Hmmn… we invited Tony Blair to be in our movie, too. It wasn’t necessarily for his expertise.

“Wall Street’s biggest brat, Jim Cramer,” writes a reader “was on the Today show in Fluff-merica yesterday wearing his biggest pouty face. His latest railing? We should be as indignant as he is because Fed governors aren’t elected officials. All this, I suspect, because his pals on the Street haven’t been bailed far enough out by more and more rate cuts.

“Funny, I don’t remember hearing about the need to turn these into elected positions when rates were dropping precipitously.

P.S. You’ve got just a few more days to take advantage of our three-month trial offer of Energy & Scarcity Investor. ESI features the fast-moving small-cap energy plays of our oil adviser Byron King. Check it out now,
before we hike the prices on Monday.

• U.S. markets suffer wild volatility… the only believable explanation for yesterday’s sudden spike
• FOMC minutes show a mutinous Fed… dissent among the ranks leaves traders uneasy
• When people can’t borrow against their homes… consumer credit spikes to all-time high
• Wall Street invents global warming index… place your bets on the fate of our planet
• Mayer on the methods of great investors: diversification? Overrated…
• Plus, top 10 funds of 2007… an ironic trend that should confirm your 2008 outlook

Markets suffered another volatile day of trading yesterday. The Dow had fallen nearly 150 points by 2 o’clock, but, by some market miracle, it managed to rally over 200 points in the final hour, to end the day up over 1%. The S&P 500 and Nasdaq behaved similarly, but fared even better… both rose 1.3%.

Yesterday, marked the first day in 2008 when all three indexes closed higher.

Why the sudden comeback, you ask. We searched high and low for a good reason for the sudden reversal — ironically, led by the dogs of Wall Street such as JP Morgan, Citigroup, E*Trade and Merrill Lynch. Alas, we found only one shred of evidence for yesterday’s sudden reversal of a nasty six-day losing streak, penned by Ambrose Evans-Pritchard of the Telegraph:

“On Friday [Jan. 4], Mr. Bush convened the so-called Plunge Protection Team for its first known meeting in the Oval Office. The black arts unit — officially the President’s Working Group on Financial Markets — was created after the 1987 crash.

“It appears to have powers to support the markets in a crisis with a host of instruments, mostly through buying futures contracts on the stock indexes (Dow, S&P 500, Nasdaq and Russell) and key credit levers. And it has the means to fry ‘short’ traders in the hottest of oils.”

Federal Reserve officials significantly disagreed over the rate cut decision in December, the latest FOMC minutes reveal. For the first time since the spree of rate cuts began in August, multiple Fed governors cast a vote of dissent against Ben Bernanke’s ultimate lending rate decision.

Representatives from three regional Fed banks — San Francisco, Boston and Minneapolis — desired 50 bps cuts of the discount rate, while Dallas and Kansas City wanted no change in rates. The seven remaining banks ultimately outweighed this dissent… but it’s worth noting: The Fed is becoming increasingly indecisive as the economy worsens.

Tony Blair, the former U.K. prime minister, just took a job with JP Morgan. The former world leader signed on as a part-time adviser to the investment bank… interesting times.

JP Morgan’s new face of international guidance

Citigroup and Merrill Lynch are rumored to be seeking even more foreign capital. According to The Wall Street Journal, Citigroup might be shopping for as much as $10 billion in additional funding, likely from the Middle East or Asia.

Consumer borrowing shot up to an annual rate of 7.4% in November, or $15.4 billion, reported the Fed this week. Credit card debt, as you’d expect, led the way during the start of the holiday season, spiking to an annual rate of 11.3% — the seventh consecutive monthly increase.

But lest you fret, mortgage applications soared in the holiday week ending Jan. 4. The Mortgage Bankers Association reported yesterday that despite a shortened business week, application volume spiked 32%.

The housing market will worsen straight through 2009, with a rebound unlikely until 2010, Fannie Mae chief Dan Mudd forecast before the Chamber of Commerce this week.

Afraid global warming is ruining the earth’s climate? Now you can put your money where your mouth is. UBS announced the launch of the UBS Greenhouse Index today, a derivatives index that will allow investors to bet on the impacts of rising global temps and carbon emissions.

“Great investment returns often come out of portfolios made up of a few stocks held for a long time,” says Chris Mayer, imparting his seasoned market wisdom. “And over time, these stocks come to dominate the portfolio.

“Really, this is one of the key ingredients to successful investing. You should invest only when the odds tilt heavily in your favor. Since these opportunities are, naturally, rare, you ought to bet big when you find them. If you manage to avoid big losers, you will do well over time.

“There are a number of investors out there today who practice this credo. Mark Sellers at Sellers Capital is one of them. I saw him speak about this exact topic at a recent investment conference. In his presentation, he showed the following table. It lists some of the most successful long-term investors in the market today

“A cursory glance shows you how important their top holdings are. At the bottom of the chart is the Vanguard 500 Index, which represents the market. You can see that Exxon Mobil, the largest stock in the index, makes up only 3.9% of the total. By contrast, all of the top positions of these investors make up much bigger percentages of their portfolios.

“You have to have a lot of conviction about an idea to bet that big. But you don’t have to go whole-hog to apply the basic lesson to some degree in your own investing. Instead of owning 50 or 100 stocks… try to pare that list down to the best ideas. Instead of investing in blah mutual funds that own hundreds of stocks and turn them over every year, try to find those that own fewer stocks and hold them longer.”

Naturally, Chris provided a list of some recommended focus funds to his Capital & Crisis readers this month. If you’d like to see them, click here.

But for education’s sake, lets check out the list of 2007’s best performing mutual funds, as recently published by Morningstar:

Oh… sweet irony. It wasn’t long ago when emerging markets were reserved for quirky traders with deep pockets and even deeper risk tolerance. Who would have thought that putting your money anywhere in India would be safer than owning Citigroup?

Safe to say… times, they are a-changin’.

Gold continued backing off yesterday’s high of $890, falling as low as $870 overnight. As we write, the precious metal is trading around $880. While gold is a natural choice when facing a recession, we wonder, has it become overbought in the short term?

Both the European Central Bank and the Bank of England chose to leave rates as is today. Look for the dollar to suffer even more when the Fed cuts at the end of the month.

“I must not be very smart,” begins a reader. “For some 5,000 years, the world accumulated a silver surplus nearly every year. Over roughly the last 50 years, that surplus has disappeared. Today’s world production falls short of world consumption. Only recycling keeps the silver shortage from worsening. Fifty-plus years ago, there was approximately 10 times as much silver available aboveground as gold. Today, because gold is not used heavily in industry, that ratio has nearly reversed.

Last, we thank you for your hundreds of e-mails encouraging the development of an “investment digest.” There wasn’t a single naysayer in the whole bunch… perhaps a first for The 5 Min. inbox. We’ll put it on the front burner. Keep your suggestions coming.

P.S. Oil has retreated down to $93 as we write today. The average blue chip oil investor has consequentially taken a beating… names like Exxon, Conoco and BP are all sharply down. As evidenced today, oil’s rise to new highs won’t come without pullbacks.

That’s another reason why we’re offering three free months of Byron King’s Energy & Scarcity Investor. Byron’s small-cap energy picks serve as brilliant hedges for those bullish on our energy future, but weary of Big Oil’s recent run-up. Learn more about our free three-month offer, as well as Byron’s latest geothermal pick, here.

• Did the consumer save Christmas? The first glimpse into the holiday retail results
• Another U.S. bank bailed out by a foreign wealth fund…
• Dollar ends recent rally… a 2008 greenback hedge worth considering
• Byron King on an oil trend to “watch like a hawk” in the new year
• Plus… how much would you pay for the rights of man?

The 2007 holiday buying season was a flop…sort of. Spending from Thanksgiving to Dec. 24 rose 3.6% from last year… but that’s the slowest growth rate in four years.

According to a MasterCard study released today, spending growth was nearly halved from 2006’s 6.6% rise and was far below the 8.7% growth in 2005. Over 1.2% of this year’s “holiday” MasterCard purchasing growth was spent on gasoline.

Americans were at least 30 days late on over $17.3 billion in credit card payments in October – up 26% from the same time the year before. Likewise, the total funds in default rose to nearly $961 million, an 18% increase year over year.

Merrill Lynch grabbed the biggest financial headlines while you enjoyed your yuletide festivities. The bank, like many before it, announced it needed a multibillion-dollar bailout to stay afloat, and consequentially scrambled abroad for SWF capital.

The bank announced it would raise over $6 billion in the near future, $4.4 billion of which will come from the Singaporean sovereign wealth fund Temasek.

Ironically, we were surprised to hear the remaining funds were originated on American soil. U.S. firm Davis Selected Advisors will snatch up $1.2 billion of Merrill common stock, while Outstanding Investments pick GE has agreed to buy most of Merrill’s commercial finance biz, Merrill Lynch Capital.

If you haven’t checked out our report on SWFs and your retirement , it’s worth a read.

“The U.S. banks have abandoned their ‘Super-SIV’ plan to create an artificial market for each other’s nontradable mortgage-backed securities,” observes our colleague Dan Denning from his perch in Melbourne, Australia.

“Apparently, it is a lot easier to borrow several billion dollars from a sovereign wealth fund and sell equity in your firm, instead.

“Existing shareholders are already sitting on falling share prices. Now they face dilution in their shares. The upside? The banks get recapitalized, rather than being dismembered and sold off piece by piece to the highest bidder.”

Still, the news from Merrill began a holiday buying spree on Friday that has yet to stop.

This morning, the Dow and S&P 500 were up over 2% since we wrote to you on Friday.

The dollar didn’t fare so well. The index fell over the weekend, from 77.7 to 77.2.

The greenback’s sudden stumble came at the hands of the euro, which rallied from $1.43 on Sunday to just short of $1.45 this morning. As EverBank’s Chris Gaffney warned on Friday, the pound remained the ugly duckling of the currency world, falling to four-month lows versus the dollar, at $1.98.

The yen weakened against the dollar, too… it’s back down to 114 this morning.

The Indian rupee has been tightening an already remarkable grip on its 2007 gains. Unfazed by the global credit crisis, India’s currency looks as if it will party into the new year, with over 12% gains versus the dollar this year:

Since we’re in the business, we’ll forecast an even stronger run for the rupee in ’08.

Here’s a dollar hedge that may prove useful in 2008. Or, well, at least… it worked brilliantly in 2007… invest in Canada with American dollars.

In 2007, as in many other years, Canada’s S&P/TSX Composite was caught in almost lock step with the S&P 500. Had you invested in the TSX with Canadian dollars, you’d be up about 5%. But the EWC, an ETF that tracks Canadian growth almost exactly as the TSX, gained as much as 40% this year. Why? Greenbacks…

By buying a Canadian tracking ETF with U.S. dollars, any EWC investor benefited from both currency appreciation and Canadian growth. Such compound ETF appreciation worked similarly in other growing markets where the dollar sank, such as Australia. Likewise, any poor Canadian sap lured into buying U.S. benchmarks with loonies took a loss in 2007.

On Christmas, Turkey bombed northern Iraq again. The act sent oil back up to $94. That and this…

A Conoco Phillips pipeline sprung a leak in Alaska’s North Slope last week.

“Thankfully, it was small — 102 barrels — and quickly contained,” reports our oil correspondent Byron King. “The leak did not interrupt overall North Slope extraction or delay the flow of oil through the Trans-Alaska Pipeline. But it is the way that the leak occurred that is disconcerting.

“Apparently, rust formed on the outside of a gathering pipeline that serves the Kuparuk field. The initial corrosion occurred beneath an outer layer of insulation, so it was not visible to external inspection. But neither could the rust be detected via internal inspection (known as ‘pigging’ — don’t ask). Eventually, the pressure within the pipeline burst through the area weakened by rust. Oil sprayed out, soaked into the adjacent snow and was blown some distance by the howling winds.”

Much of the world’s oil infrastructure is decades old and long past its design life.

“The world’s oil supply and demand are balanced on a knife’s edge,” says Byron. “If some larger issue — a larger leak or the failure of an offshore platform — arises and takes down any significant amount of oil output, prices could easily spike on world markets.

“You have to watch the world’s oil patch like a hawk.”

Luckily for you, Byron’s doing just that. We expect you’ll be hearing a lot about the world’s infrastructure — oil, water, energy, transportation — in the new year. Each of our Agora Financial editors has identified critical areas in delivering the resources necessary to maintain the world’s population in the manner to which it’s become accustomed. For our most comprehensive, and least expensive, way to capitalize on the gains we expect to make in 2008 and beyond, see our limited Agora Financial Reserve offer.

Lastly, perhaps the most important document ever to be auctioned was sold last week. One of the 17 known copies of the Magna Carta was sold by Sotheby’s last Tuesday for over $21 million. The 800-year-old script, the cornerstone of rule by constitutional law, was sold to David Rubenstein, co-founder of the controversial private equity firm the Carlyle Group.

What $21 million will fetch you these days…

Rubenstein has already agreed to loan the document to the U.S. National Archives, and thus, the one American-owned copy of the Magna Carta will remain in the U.S.

As if this transaction weren’t quite strange enough already… the seller of the Magna Carta? Ross Perot.

“After reading your discussion about SWFs investing in U.S./European banks,” writes a reader, “I wonder if their investments give them access to depositor information. I know what your response will be, but I will still wonder. Maybe the U.S. government should print a few more greenbacks and invest in some Chinese, Indian and/or Russian banks.”

The 5 responds: No doubt they’ll be printing greenbacks in 2008. Whether the Russians or Indians will still want them… well, that’s another question.

“With regards to the farmer who wrote in saying that hydrogen was the only viable alternative energy source for transportation,” writes a reader, “I respectfully inquire if he has ever heard of the Hindenburg.

“I don’t believe that the widespread use of hydrogen will ever happen because, unlike gasoline and diesel (Hollywood pyrotechnics notwithstanding), it is not flammable; it is explosive. The danger will be apparent well before any crazy scheme to roll out nationwide hydrogen-fueled cars gets anywhere. I, for one, wouldn’t be caught dead in a hydrogen-powered vehicle. Or should I say, I would be caught dead. Oh well, you catch my drift.”

The 5 responds: We’re willing to bet the technology has improved a little since 1937. In fact, we’re going to sic our small-cap technology guru on the case early in ’08. Thanks for the skeptical tip.

“Fed rates may be lower,” writes another, “but not mortgage rates. In fact, I am facing a situation that is potentially very bothersome for our national economy.

“Obviously, WAMU and most other financial institutions are losing their shirts right now, and they all want to make some money by increasing the spreads to their best customers. If this is happening to me, with a credit score of 770, it is happening to everyone. I think we have a big problem ahead of us.”

The 5 responds: This is another trend that’s sure to get worse before it gets better. ARM resets, the principal villains behind the tightening of the credit market, don’t peak until late February, two months hence. Most major players in the mortgage industry are bracing for a tougher year in ’08 than the carnage we saw over the past six months.

Hope you had a Merry Christmas,

Addison Wiggin
The 5 Min. Forecast

ADDITIONAL RESOURCES
How currency appreciation compounds the returns on foreign equities for U.S. investors
Magna Carta sold for 21.3 million at New York auction
Kuparuk pipeline leak spills oil-water mixture

• How the most profitable trade in history saved Goldman Sachs
• Another bank bites the dust… another SWF lines its pockets
• Chris Mayer on how falling home prices are even worse than they seem
• Our Maniac Trader on corn ethanol’s “dead zone”… plus his picks to usurp the ethanol throne
• Ron Paul zealots lash out at The 5… your editors set the record straight

Three analysts at Goldman Sachs just took the prize for the most profitable trade in history. In the wake of Goldman’s earnings statement yesterday, we’ve come to learn that a trio of traders — none over 40 years old — were all but single-handedly responsible for keeping Goldman’s head above water in 2007.

Long story short, the three shorted the subprime market like no other market has been shorted before… to the tune of over $4 billion in profits. Proceeds from the trade were wiped out thanks to bad bets elsewhere in the firm, but this gamble will still go down as the most successful of all time (ousting George Soros’ $1.1 billion gains from shorting the pound in 1992).

And good deeds don’t seem to go unnoticed at Goldman Sachs… each of the three men are reportedly getting $10 million bonuses this Christmas.

That deal certainly piques our “short” interest. We’ll be launching Dan Amoss’ Strategic Short Report in early 2008… keep an eye out for it. In the meantime, there’s one way to get it for free… learn about it here.

But it might not be all sunny skies and rainbows over at Goldman…an unnamed senior executive told CNBC yesterday that the firm’s November performance was “horrible” and that last two weeks were possibly the worst in Goldman’s trading history.

“November was very difficult,” was all Lucas van Praag, Goldman’s chief spokesman, was willing to say. We predicted yesterday that Goldman might lose its sterling reputation in 2008… perhaps 2007 still has some fight left in ’er. It might go something like this:

Morgan Stanley posted its first-ever quarterly loss today. The bank added another $5.7 billion to the previously announced $3.7 billion in write-downs. The nearly $10 billion in write-downs spelled a $3.5 billion loss for the firm this quarter… ouch.

But wait, it gets worse. Morgan Stanley simultaneously announced a $5 billion injection from… drumroll please… a sovereign wealth fund! China’s state-owned China Investment Corp. now owns a multibillion-dollar stake in Morgan Stanley, worth barely less than 10% of the whole firm.

“The collapse of the housing market is worse than it looks,” says Chris Mayer. “Interesting story in the WSJ today about how sellers are offering bigger incentives to buyers. These incentives don’t show up as part of the public record, which records housing transactions. But they can be substantial.

“What’s happening is something like this: Someone sells a house for $200,000, but gives $20,000 in incentives. For purposes of tracking housing prices, $200,000 is the sale. In reality, of course, the true net price is only $180,000.

“This practice fools all the data-gathering services. Bottom line: Housing prices are falling more than reported.”

If you’re looking for a housing-proof portfolio, few are more reliable than Chris’ Capital & Crisis recommendations. His readers are up about 25% this year despite some of the worst market conditions since the tech bust. Click here to learn more.

Ben Bernanke and the Fed proposed significant new mortgage restrictions and laws yesterday. Under the Fed’s proposed regulation, mortgage lenders would be forced to show that subprime borrowers can realistically afford their mortgages. Lenders would also be required to more overtly disclose the types of fees and rate adjustments that are currently crushing subprime homeowners.

And of course, Bernanke suggested that borrowers be allowed to sue lenders that violate his proposed rules. That’s precisely what the country needs… more government-enforced regulations and civil lawsuits.

Bernanke’s proposal certainly doesn’t help subprime borrowers already in trouble. Yesterday’s RealtyTrac data showed nearly 202,000 foreclosure filings in November, up 68% from the same time last year. Nevada once again topped the foreclosure charts, with a filing rate of one in every 152 homes.

By the time any kind of subprime regulation or bailout comes to fruition, we think this crisis will have already taken its toll.

Here’s a sizable correction to a report in yesterday’s 5: The government announced earlier this week that the entitlement deficit had grown a trillion bucks, to $45.1 trillion in 2007. Slap on at least $4 trillion more, says our government stats watchdog John Williams.

“On a consistent basis, year to year, I estimate the 2007 deficit at $5.6 trillion, or worse,” writes John in his latest Shadowstats report.

“The results show that the GAAP-based deficit, including the annual change in the net present value of unfunded liabilities for Social Security and Medicare, narrowed to $1.2 trillion in 2007, from $4.6 trillion in 2006. The reported reduction in the deficit, however, was due to a one-time legislative-related accounting change in Medicare Part B that likely will be reversed, and, in any event, needs to be viewed on a consistent year-to-year accounting basis.

“The [Treasury’s annual financial] statements show that the federal government’s fiscal woes continue to careen wildly out of control. The phrase ‘out of control’ is not used loosely. If the government were to raise taxes so as to seize 100% of all wages, salaries and corporate profits, it still would be showing an annual deficit using GAAP accounting on a consistent basis.”

“Creating money this way is a barbaric process because it further debases the dollar,” writes James Turk in response to the latest round of liquidity injections by the world’s central banks. “But it is hailed by the banking insiders and their apologists as a brilliant maneuver to fight the worsening liquidity crunch. Of course, it is a view of those with vested interests and, bluntly, is just their selling pitch to the masses.”

“We are in a monetary crisis… It is a crisis of fiat currency, where ‘money’ can be created out of thin air in an instant and in any quantity, which are actions that cause people to distrust the money. This lowers the demand for the debased money, and eventually leads to a flight from it.”

The bright side to this story, according to Mr. Turk? These waves of injections create “a wonderful opportunity to buy more gold bullion and get rid of overvalued dollars, dollars that continue to be debased and inflated.”

Gold prices traded flatly overnight in the $800-805 range, most likely waiting to hear the results from the Fed’s cheap money auction on Monday.

And as European printing presses whirred to record-breaking speed, the dollar continued its recent rally. The greenback is now up to $1.44 on the euro and $2 even on the pound. The dollar index has held steady at 77 all week.

“The costs of corn-based ethanol are getting more expensive by the day,” reports Kevin Kerr. Aside from the usual ethanol shortcomings — expensive startup, low fuel yield, depletion of the world’s food supply, etc. — Kevin’s found even more tangible evidence of the ethanol hoax — the expanding “dead zone.”

“The dead zone is a 7,900-square-mile patch of ocean that has been ravaged by runoff from the Mississippi River. The river is a conduit for millions of pounds of nitrogen that is used to fertilize all of this corn.

“The nitrogen makes its way into the Gulf and basically depletes all of the oxygen. Fish, shrimp, crabs and vegetation all suffocate… just another example of the devastating impact of corn-based ethanol. I was on the air with a Louisiana radio station and the phones lit up to talk about this subject and to try to find a solution. One thing is clear: More corn is not the answer.

“To me, biofuel and bioheat from soy- and sugar-based ethanol are the clear winners going forward. The damage corn-based ethanol causes, coupled with the low return on investment, means that corn-based ethanol is not likely going to last.

“That doesn’t mean corn as a crop will not continue to do well — not at all. Corn demand is higher than ever and will likely just keep going. The big winners, however, will be sugar and soybeans once the shift to a better alternative begins, likely sometime in mid-2008.”

For more on the ethanol hoax, click here.

“The scary part of everything happening is that while most think 1929 cannot happen again,” writes a reader, “because, after all, we crashed once in the ’80s and the computers took over and saved us. Sadly, it can happen again. The market CAN crash.

“A Depression CAN happen again because we are now worse off overall than in the 1920s. The current account deficit is beyond scary. It’s a global disaster waiting to happen. We continue to treat government like a money tree — all you have to do is walk outside and pick what you need. Tomorrow will take care of itself!

“The best protection will be for small investors to be debt free, at the very least. House — paid off or close to it. No credit cards sitting there with thousands in outstanding debt. School loans… paid off entirely.

“Even the middle class readers can do that if we play wisely with investments, make smart decisions, take advantage of trends and don’t run out and take a second and third mortgage for the addition to the house. Make wise trades, and do it with confidence to take control of your own future. The future is not going to be nice and you’ll need a truckload of cash to pay for milk if the political class doesn’t do what needs to be done.

“It will make the fall of Rome look like a tea party.”

“Your nihilist approach to Ron Paul and the presidential status of the U.S. show you to be just another apathetic who deserves any other useless president that comes along,” writes a reader. “Paul does stand a chance, and he could well win. But it won’t be thanks to anyone like you. It might take a virtual revolution, but that could happen, and would be preferable to your acquiescence to failure.

“Future reality is never a done deal; it is always in the making. Get out there and make a new future, instead of slouching around saying, ‘I have to take the one they are gonna give me,’ or, by implication, ‘The system cannot be changed.’ Rubbish. The system will change. It’s just a matter of how and when. Your apathy is an invitation to an even worse one.

“If you are American, you might be better off just emigrating to Panama, Nicaragua or some other haven and renouncing your American citizenship, as you are incapable of even giving verbal support to those offering help with the administrative problems plaguing your country and people.

“Anyone content on accepting a bad system deserves to stay suffering in it. As such, I expect you to never again say anything against the Fed or IRS: You deserve them.”

The 5 responds: Perhaps. Or maybe we’ve been spending absurd amounts of time writing books that explore fiscal responsibility (sweet irony, eh?) and governmental change… and obscene amounts of money financing a movie that highlights these issues and the efforts real people are making to change them. Yeah, come to think of it, we’ve spent most of 2007 working on it, day and night, while still taking time to write to you and run our business. If that’s what you call “slouching” and “apathy,” we’d love to know what you’ve been up to.

Addison Wiggin
The 5 Min. Forecast

ADDITIONAL RESOURCES
The $4bn killing
Fed Approves Plan to Curb Risky Lending
November foreclosures take a dip

• Freddie Mac drops a bomb… could housing take yet another turn for the worse?
• Apparently so… NAR reveals all-time-scary home sales stats
• The dollar rallies, pushes loonie clear back to $1.00… is this the end of the commodity currency rally?
• China and India face new competition… 10 Asian nations unite in EU fashion
• How ethanol could literally keep you up at night in 2008
• Plus, GM unveils the car of the future… that only the Chinese can buy

In December 2004, we ran the playfully facetious headline “The Total Destruction of the U.S. Housing Market.”

Today, we take a moment to reflect on our forecast.

The crux of our argument at the time was that Fannie Mae, the nation’s biggest — and government-backed — enabler of the subprime mortgage market, was in deep s$*t. Internally, it had published a report revealing the firm’s exposure to the derivatives market. The author of the report was reprimanded… fired… and then the report mysteriously disappeared from the Internet.

Fannie had been engaged in Enron-style accounting. Heck, it even used Arthur Andersen as its accountant — the same firm used by Enron. Franklin Raines, then CEO, was asked to resign. His severance and bonus structure came under scrutiny. And several of the top executives he’d brought in to Fannie after his tenure as budget director in the Clinton White House suffered a similar fate.

Congressional hearings followed suit. The great fear at the time was that Fannie would have to slow its purchasing of mortgages… and tank the housing market. It was ugly. It looked bad.

It was soon completely forgotten.

Today, however, the saga rears its ugly head once again…

After the closing bell yesterday, Freddie Mac, Fannie’s more heavily exposed brother, halved its quarterly dividend and announced it would sell $6 billion of its own stock. Ouch…

Freddie posted a $2 billion loss last week — three times what analysts had expected. And disclosed that it needed to raise more capital to meet regulatory requirements. In order to raise that capital, Freddie cut its dividend by 50%. The trouble in Freddie’s accounting department has whacked the stock for 50% since the beginning of November.

“News from Freddie Mac lately has been nothing short of terrifying,” reports Brian McAuley of The Survival Report. “While the market seemed fixated on the dividend news, the far more important news went largely unnoticed. If market conditions continue to deteriorate and the dividend cut fails to raise enough capital to meet regulatory requirements, Freddie says it will consider slowing purchases in its mortgage portfolio.

“This is a very big deal for the housing market. Ever since the secondary market for mortgage-backed securities dried up over the summer, Freddie Mac and Fannie Mae have been the reliable source of credit that has kept a pulse beating in the mortgage market. Now Freddie is telling us that if conditions continue to deteriorate, it may have to purchase fewer mortgages….

“Up to this point, even as the availability of jumbo loans, no-doc loans, interest-only loans and various adjustable-rate products became scarce, there was some comfort in knowing that Freddie and Fannie would always be there to buy standard full-documentation loans for amounts less than $417,000.

“However, if Freddie and Fannie are forced to curtail their purchasing of mortgages, this would take even more homebuyers out of the market.” In other words, the mortgage industry is continuing to slide from bad to worse… and taking the housing market with it.

As if on cue, the worst home sales report of all time was issued this morning. Existing home sales fell 20% in October (year over year), to an annual rate of 4.9 million, the lowest ever recorded by the National Association of Realtors.

The median price of homes sold during October fell over 5% from the same time in 2006, to $207,800 — a record drop and record low of its own. October marked the 15th out of the last 17 months in which this price measure posted a year-over-year decline.

And wouldn’t you know, a record level of homes are now sitting in inventory — a whopping 11-month supply.

“No matter how you slice it, fewer mortgages mean fewer homebuyers, and that means lower home prices,” say The Survival Report duo. Mish and Brian punched the numbers and forecast home prices to fall as much as 43% by 2011. To find out if your home is at risk, click here.

And yet… even with the real estate market imploding and banks getting hammered alongside it… the U.S. markets rallied yesterday, sending the Dow up 1.7% and the Nasdaq and S&P 500 up 1.5% apiece.

Citigroup’s Arabian tryst must have sexed up traders on the financial sector. Is there a sovereign wealth fund ready to whisper sweet nothings… and slap nine-figure checks on the bedside table… for every flailing financial business on the Street?

Apparently so: J.P. Morgan, Barclays, Merrill Lynch, American Express and Morgan Stanley all rallied big.

Even Wells Fargo got a little action… despite the $1.4 billion write-down they announced yesterday. The news comes just 10 days after CEO John Stumpf assured his shareholders that the company was well positioned to weather the storm.

Wells Fargo stock shot up 5% this morning. Again… all we can say is: Huh?

The dollar rallied with vengeance overnight, too. The greenback gained two full points on the yen, back to 109… pushed the euro back to $1.47. And kicked the pound to the curb at $2.05. Ka-pow!

The Aussie and loonie rallies have run aground. One month after being almost a nickel short of greenback parity, the Australian dollar is back down to 87 cents — a 2½-month low. The Canadian dollar, after reaching $1.08 three weeks ago, is struggling to maintain parity this morning at US$1.00 even.

“The commodity currencies like Aussie and Canadian,” laments currency voyeur Chuck Butler, “have really been taking on water lately.

“Their weakness has to do with the weakness in commodity prices, to a degree. But if we go back to 2003 — when the first commodity sell-off began — we’ve seen about a dozen or so of these commodity sell-offs, and each time the commodities have come back even stronger. So I’m not about to give up on them yet.”

“Cyber Monday,” as retailers are labeling the Monday after Thanksgiving, saw a 21% rise in sales compared with the same day in 2006. CNNMoney branded Monday “the first official day of the online shopping season,” and it seems as though consumers came out en force. $733 million was spent online Monday, $33 million more than last year. $733 million marks a 83% jump from the daily average online spending in the four weeks preceding “Cyber Monday.”

Yet just like “Black Friday,” while online shopper volume rose on Monday (by 38% year over year), the average amount of money spent per buyer fell by 12%.

Al Hubbard, President Bush’s chief economic adviser, quit his job today. It must really suck to work for this administration.

Leaders of 10 South Asian nations have agreed to join forces in an agreement similar to that of the European Union.
Dignitaries from Indonesia, Thailand, Malaysia, Singapore, Brunei, the Philippines, Cambodia, Laos, Myanmar and Vietnam met last week and have recently altered what they have dubbed the Association of Southeast Asian Nations, or ASEAN, to an EU-style bloc of unified nations.

The ASEAN agreement, originally formed in 1967, will now allow citizens of these nations less restricted travel between countries, simplified international business regulations, and enough “standardization” to make your head spin. The group aims to “substantially” reduce restrictions on air transport, health care and tourism by 2010 and most trade barriers and logistic hurdles by 2013… and have one big happy ASEAN family by 2015:

How do you say “cheese” in Malay? Or Thai? Anyone?

“Businesses say we have a five-year window in terms of catching up with China and India,” said Robert Yap, chairman of the ASEAN Business Advisory Council.

“Plans to ‘remove or relax’ restrictions on capital flows,” comments our Christopher Hancock, “are a great attempt to compete with China and India for foreign direct investment (FDI)… Remember, FDI into China wasn’t about only ‘cheap’ labor. In the long term, foreign investors wanted a piece of the potential billion-plus consumer market.

“The ASEAN agreement is a very natural step for the smaller Southeast Asian countries to play ball… However, opening up the financial services industry will present a MAJOR challenge.”

Investment-wise… Mr. Hancock recommends riding the infrastructure train for quite some time. Property development, roads, pipes, rails… steel, cement and major property development stocks. Those stocks represent a major theme in his Free Market Investor newsletter. Guoco Group, for example, has a good presence in the second-tier Asian development scheme. as well as Singapore, Vietnam and Malaysia. Be sure to check it out.

Hungarian down pillows — the most elite pillows in the world of luxury sleeping goods — are set to skyrocket in price next year. Freakin’ ethanol…

“Producers are getting into an impossible situation,” said Peter Kovacs, managing director of Hungaria Tollfeldolgozo Kft, a European and North American exporter. “Feed has become expensive, the price of maize shot up to the sky, severely affecting the viability of the sector.” Coupled with a few bouts of avian flu, Hungary’s feather production this year is slated to fall over 40%.

“Interesting that you would use Wrigley Field as an illustration for the Citi job cut story,” writes a reader in response to yesterday’s unflattering announcement.

“A more fitting analogy might be Citi Field — set to open as the N.Y. Mets home in 2009 — which, ironically, is estimated to hold… 45,000. Maybe Citi can give the firees free tix to opening day as part of the severance package. Any word on whether the field will be renamed to Abu Dhabi Field?”

The 5 Responds:
Oh, the irony. Citi will pay $20 million each year for the next 20 years for the privilege of calling the new Shea Stadium “Citi Field.”

“As much as I tend to admire your perspective,” writes another, “you are sadly mistaken in your disparaging reference to Daihatsu. I used to own a Daihatsu sedan, and it was probably the best car I’ve ever had — well built, reliable and economical (40 mpg). We could use a few more Daihatsus on the market right now.”

The 5 Responds:
Perhaps, but they still make ugly cars …

An addendum to the auto industry thread: GM announced early this morning that it would soon be unveiling a brand-new state-of-the-art hybrid car… in China.

The American automaker is aiming to compete with Toyota, currently the only manufacturer selling hybrids in China. GM claims its yet-to-be-named Chinese hybrid will be for sale in time for the Beijing Olympics.

Great idea, right? Sell the trendiest new cars to the world’s biggest emerging market? Maybe not… Toyota sold a grand total of 2,000 Prius hybrids in China last year.

Best regards,

Addison Wiggin
The 5 Min. Forecast

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ADDITIONAL RESOURCES
Wells Fargo Sinks Into Mortgage Morass
Bush economic adviser Hubbard to step down
GM to build hybrid cars in China from 2008

• 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.