• Visa’s record-breaking IPO… why odds say that buying this float is a losing venture
• Morgan Stanley shocks the street
• Fed cuts rates… U.S. stocks enjoy best day in five years
• Oil backs off record highs… the other energy source still booming
• Chris Mayer on another skyrocketing commodity… so hot it could be “a source of social unrest”
  

What credit crisis? Visa — despite all the spooky credit horror stories permeating Wall Street — managed to scrounge up nearly $18 billion last night for its IPO. As expected, it was the biggest float in the history of the U.S. stock market.

Visa’s IPO will be icing on the cake for an already sweet week for J.P. Morgan Chase. As the primary underwriters of the offering, JPM can look forward to a $1.1 billion check from Visa.

Morgan Stanley announced that it enjoyed (or suffered?) a similar first quarter as Goldman and Lehman revealed yesterday.

But traders gobbled up shares anyway. MS shot up 19% yesterday in anticipation — its best day in 10 years — and leapt another 8% at this morning’s opening bell.

Unless you live in a cave and are just now checking your e-mail at an Internet cafe in town, you know the U.S. Federal Reserve slashed rates by 75 points yesterday. For the sixth time in as many months, Bernanke and his brood pulled the lever labeled “easy money” in the corner of the FOMC meeting room. Eight of the governors standing around cheering Uncle Ben voted to pull the lever down 75 points. Two governors — Fisher and Plosser — wanted less.

“Recent information indicates that the outlook for economic activity has weakened further,” explained the FOMC in a typically bland release. “Growth in consumer spending has slowed and labor markets have softened. Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters.

As usual, the FOMC would like you to forget about inflation. “The committee expects inflation to moderate in coming quarters,” continued the statement, “reflecting a projected leveling out of energy and other commodity prices and an easing of pressures on resource utilization.” While the Fed admitted that inflation uncertainty “has increased,” it did little more than assure us that they would “monitor inflation developments carefully.”

CNN/Opinion Research released a poll yesterday showing that “the rising rate of inflation” is Americans’ No. 1 economic concern. Ninety-one percent of all folks polled by CNN listed the dollar’s devaluation as their primary fiscal worry. Worry over the value of the bucks in their wallets beat our job growth, the stock market or housing concerns in the poll.

Yet in an act of sheer defiance, the dollar index surged off near-record lows after the Fed’s release hit the wire:

We can only assume traders had priced in 100 points, rather than the paltry 75 they drummed up. The dollar index currently rests at 71.7, about a full point above its all-time high. Hooray!

The euro trades for $1.57 this morning, a penny short of its record high. The pound has fallen a bit, down 2 cents, to $2.00. The yen is back to 98, and the loonie has retreated to parity with the greenback — $1 even.

The Swiss franc, we note today, has reached parity with the U.S. dollar for the first time in history. The franc — a destination currency in the global “carry trade” — is up about 17% on the greenback in the last three months.

The stock market loved the FOMC’s cut yesterday too. Already elated with Goldman Sachs and Lehman Brothers earnings announcements, the Dow had rallied 250 points before the Fed’s announcement. Despite a sharp pullback within minutes of the release, by the end, U.S. stocks enjoyed their best day in five years:

The S&P 500 and Nasdaq skyrocketed 4.2%. The Dow mustered a gain of 3.5%.

The Dow’s 420-point gain was the fourth best in the index’s history, and you’ll have to look back to 2002-2003 for bigger one-day gains for any of these major U.S. indexes.

We weren’t surprised to see financials lead the way yesterday – just about every bank, broker and lender soared to double-digit gains yesterday. Bear Stearns is even getting in on the action:

Since it’s “acquisition” for $2 per share on Sunday, BSC has more than quadrupled.

Gold got shellacked during yesterday’s stock market rally and again this morning. Spot prices fell to around $995 after the New York close, and are sinking to $950 as we write.

We’re inclined to think, at least in the short term, the “easy money” has been made in the gold trade. But in terms of trading gold stocks, our gold adviser Ed Bugos thinks there is plenty of money yet to be made. He just published a report on the five gold stocks that have yet to catch up with $1,000 gold. You can learn more about them here.

Oil crept back up to $109 per barrel, $2 shy of its all-time high this morning before falling back to $104. While the world’s eyes have been fixated on rising crude costs, coal prices are quietly setting records, too. Check this out, from today’s New York Times:

“China’s coal consumption is mind-bending,” writes our Byron King. “China is currently building giant, 500-megawatt coal-fired power plant systems in an almost assembly line fashion. And China is installing and commissioning these coal burners at an astounding rate of THREE per WEEK!!!

“Each year as of late, China has added more electrical generation capacity than the entire nation of Germany. And Chinese electrical generation capacity has been growing at a steady rate of over 15% per year for the past five years.”

In the U.S., coal accounts for about 50% of American electricity production. The U.S. also has more coal deposits and proven reserves than any other nation. If you’re interested in investing in coal, Byron’s your man.

Rice shot up to a 34-year high this morning. Thai rice, largely considered the global standard, has risen 72% in the last three months to $640 per tonne this morning. Rice in the Philippines is selling for $702, up 50% in a little over a month.

“Some of this is weather related,” explains Chris Mayer, “but it also speaks to the larger issues of increasing resource scarcity. We see it in the energy markets; we see it in food prices. Rice is particularly important because of its central role in the diets so many people. And for many of them, a doubling in price since January is keenly felt. It’s also a potential source of social unrest.

“There is no easy way out of this. It’s going to take time and a lot more investment in agriculture. All of this spells opportunity for the number of agricultural plays out there.”

Chris’ Special Situations readers own Viterra, one of the largest grain handlers in North America. Since he recommended it in August 2006, its up over 80%. Discover the rest of Chris’ blockbuster MSS portfolio, here.

Sovereign wealth funds (SWFs) invested a record $48 billion in U.S. companies in 2007, says a Dealogic report on Monday. That’s a 165% increase from 2006, the study showed. What’s more, despite SWFs moving out of the spotlight this month, Dealogic estimates that SWFs have already spent $24 billion on U.S. securities this year… well on pace for a record 2008.

Again, we suspect these funds are going to be a key component in any investor’s successful retirement strategy. If you haven’t checked out Christopher Hancock’s work on these funds, you can do so here.

We end today lamenting the anniversary of the war in Iraq.

Five years ago today, U.S. troops unleashed “shock and awe” on ancient Babylon. Then-Secretary of Defense Donald Rumsfeld fully expected the troops would be “greeted as liberators.”

The U.S. government now estimates the total costs of the war are up to $2 trillion… give or take a trillion. And as a popular documentary last year illustrates, there’s “no end in sight.”

“No one would argue that this war has not come at a high cost in lives and treasure,” President Bush said this morning, “but those costs are necessary when we consider the cost of a strategic victory for our enemies in Iraq.”

Yeah. “I would argue,” says David Walker in the opening lines of I.O.U.S.A. “that the greatest threat to our national security is not some guy hiding in a cave in Afghanistan or Pakistan, but our own fiscal irresponsibility.”

“The dollar is depreciating against gold,” postulates a reader with a forecast of his own, “because of a fundamental change in pricing of the value of goods in the world. Commodities are priced against each other, and only because of tradition are we still quoting commodities in U.S. dollars.

“Until quite recently, gold, oil, copper, lead, agricultural commodities, etc. were priced in U.S. dollars. They are still quoted as such, but in reality, the commodities are valued against each other, just as it was done during early civilization. Of course, the one major difference is it’s all done electronically. Currencies have become irrelevant. Unbelievably, we are still in awe when we hear a report that gold went up by US$20 or crossed the US$1,000 barrier. It’s really no big deal in terms of other commodities. The price of gold over the last few years actually went down against most other commodities.

“The same is true for oil. As in the good old days of early civilization, a commodity value is now strictly based on the available supply. Today, if corn is in short supply, it will appreciate against wheat if there is an excess. Of course, when the prices of basic commodities like oil and energy are appreciating against the U.S. dollar, it will affect the people who pay for their daily needs in that currency. But the rest of the world really doesn’t care unless their currencies go down too.

“In the foreseeable future, some commodities will be in much shorter supply, in particular, the commodities that are used up and cannot be replenished. An obvious one is oil. Once we use it up, it’s gone. The supply is constantly diminishing. Not so with gold. Other metals will also become rarer, but only because high-grade ore bodies are more difficult to find and costlier to develop. The price of the rarer metals will appreciate against other commodities that are more readily ‘available.’ Gold will likely be among them.”

Regards,

Addison Wiggin,
The 5 Min. Forecast

• Gold flirts with $1,000… which headline pushed the precious metal into the 4-digit range
• S&P says end of financial meltdowns “now in sight”… but how far away are we?
• Can commodity prices hold up in a grave U.S. recession? Kevin Kerr’s answer below
• An illustration that should make up your mind about biofuel… and the coming water crisis
• Jim Rogers on the only way to fix the dollar crisis
• Last, The 5’s baby boomer blame game put to bed… for now

Gold: $1,000… well, almost.

April futures did, in fact, breach $1,000, but the spot price made it only to $999 and change yesterday before backing off. Still, at $995 this morning, gold was just one piece of bad news from a proper $1,000. Let’s go see if we can find some…

J.P. Morgan Chase and the New York Federal Reserve will team up to bail out Bear Stearns. Rumors have abounded all week that Bear Stearns is facing severe liquidity problems. But the news turns out even worse than the Street’s forecast.

Bear will be injected with yet untold billions by J.P. Morgan, which will borrow the money from federal printing presses and you.

Bear Stearns stock fell over 35% within minutes of the news hitting the wire, even after being down some 25% this week already. The whole S&P slipped 1%.

That did the trick for gold, too. On this news, gold spiked to $1,003.

“The end of write-downs is now in sight for large financial institutions,” reported Standard & Poor’s yesterday. That news helped the Dow eke out a small 0.3% gain for the day. Likewise, the S&P 500 ended up 0.4%, and the Nasdaq rose 0.7%.

But either traders failed to read the fine print, or a financial crisis is already priced into the market. The S&P report estimated total write-downs to be some $285 billion, up $20 billion from the forecast last month. While this estimate is nowhere near the $600 billion guess UBS wagered last month, it’s still significantly more than the $160 billion already written down by global financials.

To paraphrase the S&P report, we’re barely over halfway there.

While markets in the U.S. have enjoyed a rally for the better part of this week, investors in Asia are still down on their luck. The Nikkei 225 is down almost 7% since Wednesday on worries that a U.S. recession and very strong yen will stunt Japan’s export economy.

After its big drop of 3.3% this morning, the Tokyo exchange is at a 30-month low.

Elsewhere in the Pacific… Hong Kong plummeted almost 5%, while Singapore’s index shed 4%. Stocks in Seoul, Sydney and Shanghai fell about 2.4%.

Oil set an all-time high of $111 by yesterday’s close. The price has since backed off a skosh. But upward pressure remains.

“Would gold and energy and other materials be this high” Larry Kudlow asked our Kevin Kerr last night on his show, “if we were poised for a really bad American recession?”

“This is a global growth story, Larry,” the Maniac Trader quipped in response. “While the U.S. may be heading into recession, we’re still seeing a lot of world demand. I don’t think we’re seeing the price of a recession in the commodities right now, so I do think were going to see a short-term correction, which will help ease the recession.

“Longer term, I really believe these commodities are going to go higher because of that global demand.”

Water, too, remains a commodity in high demand. One driver in rising water consumption is the rush to produce biodiesel, as this McClatchy chart shows:

Across the board, consumer prices neither rose, nor fell in February, the Labor Department said this morning. We’re not exactly sure which economy they were measuring, but polled economists predicted a 0.3% jump in the consumer price index (CPI) last month, slightly less than January’s 18-month high of 0.4%.

Since inflation is under control, the Fed is free to cut rates next week without fear of ruining the economy.

Still, the dollar can’t catch a break. It found itself another all-time low last night, this time at 71.7. Similarly, the euro and pound inched higher, to $1.56 and $2.02, respectively. And for a brief second, the yen struck 99, a 12-year high.

“Those aren’t good tidings,” George W. Bush told PBS yesterday when asked about current exchange rates, “if you’re for a strong dollar like I am. One reason I am for a strong dollar is because I think it helps deal with inflation.”

Really… you don’t say?

“Did you see the president say with a straight face,” wrote a reader last night, “that he favors a strong dollar? And the interviewer failed to follow up with the logical next question — why, then, do we have $9 trillion in national debt? I could have screamed.”

President Bush likes to say he got a “B” in economics, but an “A” in cutting taxes… and being fiscally responsible with the people’s money.

Congress passed the president’s $3 trillion spending proposal this morning.

The Senate quickly authorized this massive budget for the next fiscal year, beginning Oct. 1, just a day after the current government spending data showed record-high deficit so far this year.

But that’s all part of balancing the budget by 2012, we suppose… setting new all-time spending highs each year. The logic is impeccable.

“This is getting absurd” Jim Rogers told CNBC yesterday about the dollar crisis. “I know they can run their printing presses forever, but that is not good for the world, inflation is not good for the world, a collapsing currency is not good for the world. It means a worse recession in the end.”

When asked how he would handle the dollar crisis, specifically, the first two things he would do if he were in charge, Rogers responded: “I would abolish the Federal Reserve and I would resign… no country in the world has every succeeded by debasing their currency.”

Something tells us Mr. Rogers won’t be on CNBC long with that attitude.

“With all due respect,” writes a reader in response to our friendly debate about who is really to blame for the nation’s economic woes, “a cursory analysis of the ages of those who have most influenced U.S. economic and monetary policy over the last 30 years would suggest that our current deficit crisis (in most aspects) was a product of the ‘Greatest Generation.’

“The baby boomers are just starting to retire, and will face depletion of the trust funds, etc., in their retirement, while the architects of our troubles, from 1971 onward, will most likely die before their legacy comes to fruition, having both the ability to live off the spoils of the longest boom in our history and the tail end of the trust funds.

“Perhaps the hubris of winning World War II contributed to the mentality that the U.S. could overcome any obstacle, even deficit spending.”

“I am a boomer,” counters another, “and I have always thought my generation was a pack of super lemmings. Depending on the time frame, I have been called a freethinker, radical, rebel, rabble-rouser, social Darwinist and anarchist. Recently, in politer circles, I am an eccentric.

“Twenty-five years ago, I was blacklisted. In the Old West, a man’s survival threatened to that degree led to a hanging (horse thieves). Today, that is unacceptable. With the exception of family and a couple of close friends, ALL of my so-called peers supported the list.

“I have had an interesting and productive life since, but quite lacking in sympathy for the kind of trivia I ‘m seeing here. A good dose of truth has a salutatory effect on occasion, and you are to be commended for providing it.”

The 5 responds: Judging by the amount of mail we’ve received on this issue, age is a hotter subject than sex in this country. As well it probably should, given the tsunami headed for the nation’s financial situation.

One common thread stands out among the writers: Each generation is all too willing to blame the one before it for the mess it perceives the country to be in. Boomers do appear, at least from the cross section of letters we’ve received, to have a higher degree of self-loathing than either the “Greatest Generation” or those in their 30s — the so-called “Generation X.”

For our part, we’d like to apologize for being so general about our comments, and leave you with these words of wisdom from the generation that follows us:

“As for my and everyone else’s generation,” writes our last reader on the subject, “the vast majority of each are ignorant, especially financially so. Basic finance isn’t even taught in public schools. Thus, it would be idiotic of me to defend my demographic simply because I am lumped in by the fact of my age.

“What’s next, defending the actions of the Fed simply because it is American and so, by birth, am I?

“In regard to the vocal defenders of their demographic, don’t you find the level of groupthink a tad surprising for a publication catering to those sympathetic to a contrarian financial perspective?”

Enjoy your weekend,

Addison Wiggin,
The 5 Min. Forecast

P.S. By the way, if you’re a current subscriber to Resource Trader Alert, Outstanding Investments or Energy & Scarcity Investor and you’d like to join the Resource Reserve, we failed to mention we’ll credit your account the subscription fee of your existing pub toward the discounted Reserve Membership. You can claim that credit by calling 1-866-361-7662. But please do so by Monday — we’re trying to close the membership drive.

• Fed to the rescue… markets stage best rally in years on news of latest Bernanke bailout
• The true beneficiaries of the Fed’s latest move
• John Williams on the long-term effects of the TSLF
• An “eye-popping” bond event… U.S. debt no longer the world standard
• Gas prices strike record high again, plus the most expensive gas station in the U.S.
  

Rejoice! The benevolent Fed saved the market… again.

The Fed’s new TSLF — a promise to swap Treasuries for mortgage-backed securities — kicked off the best day for U.S. stocks in five years.

The Dow shot up 417 points, or 3.5%, its best percentage gain since March 2003. The Nasdaq also had its biggest percentage gain since spring ’03, up nearly 4%. The S&P hasn’t seen a day this good since May 2002… it popped 3.7%.

Stock markets in Asia rallied big on the Fed bailout plan too. Markets in Australia, Hong Kong, Malaysia and Singapore all surged about 3%. Indian and Japanese markets gained 1% apiece.

In classic form, whatever America did, China did not. The Shanghai Composite fell 2.3% on rumors the Chinese central bank is planning to hike rates again… and the government is devising more ingenious ways to stymie inflation in their fledgling capitalist economy.

Mortgage enablers Fannie Mae and Freddie Mac were by far the most appreciative of the Bernanke clan offering. Once “sure thing” darlings of state pension plans and corporate retirement accounts alike, the government-sponsored mortgage lenders have already endured one hell of a year.

Both firms plunged 12% on Monday after a Barron’s report suggested the two companies were (gasp!) spiraling toward insolvency and would need a government bailout. Little did Barron’s know that the bailout was just a few hours away. As of March 27, up to $200 billion in Freddie and Fannie mortgage-backed securities will be as good as government bonds. (Ha!)

Both stocks popped over 10% yesterday. Still they remain about 75% off their all-time highs. Together, Fannie and Freddie account for approximately 45% of the $11 trillion U.S. home loan market.

The chairman prays: Please, God, don’t let Fannie and Freddie die

If Fannie and Freddie were the beneficiaries of yesterday’s bailout plan, Treasuries were not. For the first time since Word War II, owning U.S. Treasuries is a riskier bet than owning German bonds.

On the basis of credit default swaps, which are used to speculate on a government’s ability to repay debt, the 10-year note traded at a record-high 16 basis points today. German bunds are trading at 15 basis points, also a record. A decline in these spreads shows improving confidence in the government’s ability to pay… an increase shows the opposite.

By way of comparison, before the credit crisis began in July, U.S. credit default swaps were at 1.6 points, compared with 2.5 points on bunds. The rapid rise in both U.S. and German bonds shows how much the credit markets have seized up since the subprime mess began.

“The U.S. government is not immune from the consequences of the credit crisis,” Fabrizio Capanna, a corporate bond trader for the French bank BNP Paribas told Bloomberg yesterday. “Support for troubled financial institutions in the U.S. will be perceived as a weakening of U.S. sovereign credit.”

“That’s certainly eye-opening,” writes our managing editor Chris Mayer, who flipped us the story early this morning. “The market consensus is that you stand a greater chance of default investing in U.S. Treasuries than in German bonds. The poor fiscal condition of the U.S. is no longer a matter of debate. It’s something people readily acknowledge and worry about. We live in interesting times, that’s for sure.”

For their part, currency traders didn’t seem to know what to make of the Fed’s diabolical plan. The dollar index felt some roller coaster swings:

After a wild day, the dollar index ended at 72.6 — just above its record low set on March 7. The euro still trades for $1.54. The pound remains at $2.01. Likewise with the yen… 102.

“The Federal Reserve’s announcement,” opines our friend John Williams, “that it will be providing an added $200 billion in liquidity to the system in a coordinated action with other central banks, on top of the $200 billion emergency funding announced by the Fed on Friday (March 7), again highlights the depth of and the ongoing deterioration in the banking system’s solvency crisis.

“The good news is the Fed will create whatever dollars it needs to keep the system from imploding. The bad news is the price that will be paid in higher inflation. Despite any relief rallies that seem to be taking place in the equity and dollar markets, the news here has horrendous implications for the dollar and inflation, corresponding positive implications for gold and likely continued trouble for equities.”

And more annoying data for the Fed: The U.S. trade deficit jumped to $58 billion in January, up nearly a percent from the previous month, the Commerce Department reported yesterday.

The U.S. imported a record $206 billion of goods in services during the month. Crude oil accounted for the biggest share, $27 billion. Oil traded as low as $85 in January. As oil jacked its way to $109.72 yesterday — another record high — a new record trade deficit is likely when February deficit details emerge.

Gas prices crept to another record high of their own today. AAA reports the national average price is now $3.25 for a gallon of unleaded.

If you don’t care for high gas prices, by all means, stay the heck out of Gorda, California.:

Yep, that’s $5.20 for a gallon of the cheap stuff. Our forecast was a scant winter season off.

In the middle of nowhere on the Pacific Coast Highway, this Amerigo station is the only gas for miles. James Willman, the man who attends the station seven days a week, told The New York Times yesterday that someone threatens or curses at him almost every day.

“This plan of Bernanke’s,” says one reader, “to swap Treasuries for bad paper in order to help the creators of the bad paper constitutes in my mind panic and dereliction of duty.

“What idiot would borrow from his savings account and loan it out to a gambler down on his luck to help the jerk out? Someone needs to step up and call for some kind of boycott to get the attention of these numbskulls in Washington who are playing not only with fire, but with our very lives and fortunes, and those of our children. Shame on them all.”

“I thought your edition yesterday was downright painful to read,” writes another reader. “Painful, because you lump everyone together — the baby boomers are not the instant-gratification set.

“We are the ones that help our elderly parents so they don’t have to steal cans of cat food for dinner, pay our fixed-rate mortgages that had 20% down or more, send our kids through college, pay our taxes no matter how outrageous and have no control over the federal government, the Fed, the IMF or anything else that impacts our lives — including federal support to use our food for energy, instead of filling our bellies, while they decry the use of coal, which is right in our backyards.

“We didn’t choose to go off the gold standard. We are the ones whose bank accounts are shrinking, whose retirement accounts are suffering, who lose our health benefits when we retire and who paid into Social Security all of our working lives and can’t count on it in retirement.

“So please, moderate your tone. We didn’t choose any of it, and the Democrats and Republicans never represented our interests, and don’t now.”

The 5: You’re kidding, right? Of all the mayhem in yesterday’s issue, you quibble with our use of the term ‘baby boomer’? How can you be emotionally attached to a demographic cohort? Oy. Puzzlement aside, “boomers” are roughly 44-62 today. The “me” generation is by far the most heavily represented cohort in Washington. And it shows. This next nugget is for you boomers, too:

We learned today that marijuana growers in Canada have exported much less bud as exchange rates eat into their margins.

“Canadian marijuana is now less competitive against marijuana grown elsewhere,” an economics professor at Simon Fraser University told the Missoulian this week. “This is a cost-driven business. With exports no longer viable, the British Columbia marijuana industry has certainly taken a hit, so to speak.”

The loonie trades for $1.01 this morning. Sorry, potheads, maybe you should start growing your own.

Regards,

Addison Wiggin,
The 5 Min. Forecast

P.S. Check out these recent, highly profitable investments from our resource crew, Kevin Kerr and Byron King:

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.

Click here to learn more… our offer expires tomorrow night.

• Fed fright… Bernanke sets up multibillion-dollar emergency CDO bailout
• Even the queen is worried about water… her majesty on the next “potential conflict”
• Food prices lead explosive Chinese inflation… plus charts showing food prices in U.S. growing rapidly
• Has The 5 reversed its gold prediction? Bill Bonner on the future of precious metal prices
• Plus, “the John Galt plan to save the economy”

You have to admit, widespread panic at the Fed is entertaining.

One week after calling “Mulligan” on the entire mortgage bubble, Bernanke is suggesting we pass the entire mess onto the next generation. God forbid the baby boomers ever take responsibility for their own actions.

The Federal Reserve announced this morning that it will make an additional $200 billion available to strapped lending institutions. But instead of firing up the printing presses and going about business as usual, the Fed has unveiled a whole new plot, and a handy acronym to go with it: Term Securities Lending Facility (TSLF).

The new initiative, like the old Term Auction Facility (TAF), will provide short-term loans to distressed financial institutions. But instead of enticing banks with cheap interest rates, the Fed is now offering to swap mortgage-backed securities for U.S. Treasuries.

Thus, a bank swelling with Fannie Mae and Freddie Mac paper and other “AAA” mortgage-backed assets can unload it on the Fed for the next 28 days. The Fed wants banks to take that money and lend to the masses, thus stimulating the economy. No word yet how much additional debt it will take for the government to absorb this mess.

The new TSLFs will begin on March 27.

U.S. markets loved this idea. The Dow leapt up like a leopard after a gazelle on the news — up 2% within minutes of the announcement this morning.

And not a moment too soon, Jim Cramer would say. Yesterday, the Dow lost 1.2% in its fifth day of losses out of six. The S&P 500 and Nasdaq were down 1.5% and 2%, respectively.

Yesterday was an ugly day for homebuilders. Hovnanian reported contracts for the first quarter were down 41% from the same period last year. The actual dollar value of those contracts fell as well, by 50% year over year. For the first quarter, the homebuilder reported a net loss of $130 million… twice the size of its first-quarter loss in 2007.

Another homebuilder feeling the housing pinch, KB Home, announced its closing operations in New Mexico, Illinois, Maryland and Virginia. The company posted a $772 million loss in the fourth quarter, 15 times the size of its fourth-quarter losses in 2006.

Do you think it’s possible that Queen Elizabeth II of England is reading The 5? If not, she’s getting awfully close to plagiarizing one of our drumbeat themes.

“The competition for fresh water by a growing population is itself becoming a source of potential conflict,” the queen warned her subjects yesterday. Her majesty shared a few words on Commonwealth Day regarding precarious scenarios surrounding the Nile. “This river is a fragile ecosystem and its vulnerability grows with the number of people dependent upon it, so that a single incident of pollution upstream may affect the lives of countless numbers downstream.”

“Water is going to be a priced commodity,” the U.K.’s chief scientific adviser echoed last week. He warned that food and water security could be “enormous problems” as the crisis slowly develops. Here, here. Harrumph… grumble. Ha-hem.

In the U.S., water isn’t as sparkling clean as you’d like to think. A five-month study conducted by The Associated Press found trace levels of ibuprofen, antibiotics, anti-convulsants, antidepressants… even sex hormones in the drinking water of at least 41 million Americans.

Among the hundreds of different drugs found floating in U.S. tap water, the AP reported that all were far too diluted to be considered medically useful. Darn. For what it’s worth, Philadelphia fared the worst… over 56 pharmaceuticals were found in Philly tap.

Your editors have been looking for an excuse to drink more wine and coffee anyway. Cheers.

Chinese consumer inflation grew at a stunning 8.7% in February – its fastest pace in 11 years. Food prices alone in China boomed 23% in a 12-month period ending last month. According to Bloomberg, pork prices are up 63%.

The Chinese central bank has raised rates six times over the past year, up to 7.4%, but to no avail. Rapid growth, an undervalued currency, all shades of farming crisis, a gnarly winter storm and loss of arable land to ineffective transport solutions are all factors with which even the most organized central government would have a bitch contending.

Then again, food prices in the U.S. aren’t faring much better. We present this chart, courtesy of The Boston Globe:

“As the prices of food commodities rise,” writes our crisis and opportunity champion Chris Mayer, “companies are starting to make changes to how they produce your food. This you might not want to know. Sara Lee, for example, is reformulating its breads using cheaper, lower-protein wheat.

“Food producers across the board face stiff increases in the price of certain commodities. Campbell’s Soup will cut back on the number of ingredients it uses in its soups. Some companies have much less wiggle room. If you’re Hershey’s, for example, you’ve got to worry. Hershey’s relies on expensive commodities such as milk, sugar and cocoa. There’s not a lot you can do. If you’re Tyson Foods, you need grains, which are trading near record highs.

“Commodities may face a nasty pullback, given the sharp rise in prices lately. But on the other hand, given the fall in the dollar and flow of money into commodities, it seems to me that commodity prices will only head higher.”

The U.S. dollar is doing its part to keep the commodity boom alive, too. The dollar index shimmied down to yet another record low this morning: 72.4.

The euro inched a bit further into the record high level of $1.54. The pound remains on the high end of $2.01. But the yen backed off a bit… down to 102.

Oil rolled right through previous record highs yesterday, to a new all-time high this morning of $108.

“The U.S. economy is, indeed, showing further signs of slowdown,” commented a slightly panicky spokesman from the International Energy Agency (IEA) today. “We are in an era of higher oil prices. If we look at $100 per barrel of oil, we have to do so with an understanding that prices are unlikely to return to levels seen in the early part of this decade.” You really think?

The IEA went on to lower its demand forecast for 2008, but only by a very small margin. Currently, the agency expects demand to grow 2% this year. Its expects gasoline demand to slow with the economy too.

Let’s hope so. U.S. gas prices have reached a new all-time average high of $3.23. Hawaiians are already paying $3.60 per gallon. Californians, $3.58.

Diesel has reached a record high of $3.84.

Gold rebounded this morning from yesterday’s sell-off. Spot prices shot up $20 over the past 24 hours, to a price this morning of $985 per ounce.

“Do I detect a subtle ‘changing of gears,’” asks a reader, “in your notorious bull posture with respect to gold? Seems several of you folks are taking a CYA (cover your ass) position recently?”

The 5 responds to this reader: Busted. Our position with respect to gold is only a marketing ploy to get you to buy our newsletters. Too bad it’s gone up 390% since we began recommending it at $253 in early 2000. You would have been much better off investing in tech stocks back then… and piling all your profits into real estate. Sorry to have inconvenienced you with our opinions. Thanks for reading all the same.

The 5’s response, if you’re not a cynical jackass: Of course, we get nervous when any asset we’re recommending goes up almost 400%. Show me an investor or analyst who isn’t trying to “cover their ass” every day. As our Ed Bugos points out, “Nothing goes up in a straight line.” But while a short-term correction is likely, nothing has changed with respect to the long-term case.

Here’s our most “notorious” gold bull, Bill Bonner, with an attempt to explain why:

“Even at today’s price around $975, gold is still less than half the inflation-adjusted high it set the year Ronald Reagan moved into the White House. And think of all that has happened since then! For one thing, more gold has come onto the market. Gold is never destroyed or used up. Still, an additional ounce of it is much harder to make than a crisp, new $100 bill. You have to find it and then dig it up out of the ground. That’s why the world’s gold supply increases only about 2-3% per year.

“But the supply of the paper money — in which gold is calibrated — goes up much, much faster, at least four or five times as fast over the past 30 years. And the world’s assets — also measured in paper money — have skyrocketed too. Our houses are worth three, five, 10 times as much as they were in the early Reagan years. So are our stocks. What’s more, now there are trillions of dollars worth of tradable financial assets in places where none existed at all in ‘79 — such as in India, China and the former Soviet Union.

“Gold began floating on this flood of liquidity nine years ago. It has doubled… and doubled again. Since 2001, it has gone up 240%. Since Ben Bernanke began cutting rates on Sept. 18, 2007, it has gone up 37%. And if you believe in the volume theory of money — and we do — you can reasonably expect its price to keep going up. Gold is, ultimately, money, and it is also the world’s ultimate money. Adjusted for inflation, it will have to go up to $2,500 or so, just to match the peak set in 1980.

“Most likely, it will go far further; we’re no longer young and foolish enough to think we know where.”

“Your reader who suggested he stop paying his mortgage,” opines our last reader today, “was onto something. For those too young to remember the savings and loan bailout, the only way to get the attention of the Resolution Trust Corp., the government bailout agency, was to stop making payments.

“The only people who could even make offers on the loans were the politically connected, which probably explains why our dear politicians never passed any legislation to prevent a repeat. The Keating Five and the Clintons and Whitewater were just some better-known examples. I speak from experience, having spent two years trying to buy the loan for a large apartment complex from the RTC.”

The 5: Caroline Baum suggests as much in a recent column on Bloomberg. “Any day,” she writes, “I expect some government official to unveil the John Galt plan to save the economy.” Galt, if you’re not familiar, is the iconic hero of Ayn Rand’s Atlas Shrugged — an entrepreneur, tired of government meddling, goes on strike and encourages his fellow producers to do the same. Once the world starts falling apart, the government kidnaps Galt and asks him what they should do. His plan to save the economy: “Get out of the way.”

“Today’s economic and financial crisis,” resumes Baum, “would resolve itself more quickly and efficiently if the government got out of the way. Yes, there would be pain. Some banks would fail. Others would clamp down on credit to atone for the years of lax lending standards. Homeowners-in-name-only would become renters. Housing prices would fall until speculators found value.

“That’s not going to happen. The bigger the mess, the more urgent the calls for a government solution, the more willing government is to oblige.

“We want laissez-faire capitalism in good times and a government backstop against losses in bad times. It’s a tough way to run an economy.”

Cheers,

Addison Wiggin,
The 5 Min. Forecast

• 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

• Chris Mayer on the sudden opportunity born of an Asian bear market
• Foreclosures rise to staggering heights… more than 1 in 100 U.S. metropolitan homes at risk
• John Williams on the Fed’s attempt to “fire wall” the U.S. economy
• Bond insurer shares plunge… what’s behind their rejection of Buffett
• Chavez cuts off Exxon oil supply… why neither oil traders nor Exxon shareholders seem to care
  

Early this week, Goldman Sachs analysts upped their projections for U.S. federal deficits in 2008 and 2009, to $425 billion and $440 billion, respectively. Yep, we’re definitely heading in the right direction there.

But rather than dwelling on the negative, we begin today with a buying opportunity:

As you may know, we’ve been watching India closely. You’ll recall we sent Chris Mayer and Karim Rahemtulla on a two-week mission there in October… the third such mission in as many years. Agora Inc., our parent company, opened an office in Mumbai last year. And while we found companies we like, we’ve been hesitant to pull the trigger, because the Sensex had rallied well beyond our buying range.

Yesterday, we got the retrenchment we were looking for. The Sensex has fallen over 20% in about a month. As “investors” flee, Mr. Mayer tells us prices are starting to look good.

“India is really in the early stages of a massive secular boom,” Mayer offers by way of explaining our excitement. “It begin with liberalization in 1991.” If the Sensex’s five-year chart is any indication, pullbacks such as this latest bear market are little more than brief reprieves in a strong growth trend.

The Indian middle class is multiplying over 20% per year. Indian home prices have risen 16% annually for the past four years. Around this time last year, India received the coveted AAA debt rating.

“Like any emerging market,” Chris warned when he was on the ground in the subcontinent, “there will be plenty of growing pains. There is still an immense poor population here, and many environmental/infrastructure problems — including a severe water crisis. But these warts make the opportunity what it is — an immense fiery cauldron of a market just starting the process of industrialization and billions of people wading into the rolling waters of globalization for the first time.

“I’ve gathered what I think are the three best ways to play the rise of India. Each takes advantage of long-term trends building in India. Along the way, there are bound to be some shakeouts. But for those who stick with them, I think these investment ideas will bring enormous returns.”

If you subscribe to Capital & Crisis, we suggest you read Chris’ India report today. You should have already received the link. Otherwise, click here to learn more about the three picks we recommend to capitalize on this opportunity.

Back here in I.O.U.S.A., foreclosures in the top 100 metropolitan areas of the U.S. surged 78% in 2007, reports RealtyTrac today. A remarkable 1.3% of all homeowners in these areas filed for foreclosure last year. California, Nevada, Florida, Ohio and Michigan led the way.

In response to the ongoing trouble caused by the staggering foreclosure rate, the Federal Reserve injected $30 billion of ready cash into the banking industry yesterday, via short-term loans. That’s the fifth “loan auction” conducted by the Fed since the practice began late last year. So far, the auctions have accounted for $130 billion in emergency funds for the reeling U.S. banking system.

“We need to remain very focused on the downside risks to the economy,” said San Francisco Fed President Janet Yellen yesterday. “Our job is to make sure we create enough of a fire wall … so fire doesn’t hurt innocent bystanders.”

Translation: “Forget price stability, we’re going to manage the entire economy.”

In one statement, she single-handedly repurposed the charter of the Fed. According to Yellen, the Fed’s doing a good job, thank you very much. In her view, it’s “most probable” that the U.S. economy would avoid recession.

“I have contended for some time,” notes John Williams of shadowstats.com, “that the Fed will do everything in its power — create whatever money/liquidity is necessary — to prevent any portion of the financial system from collapsing. The Fed cannot allow any sector to fail, given the heavy interrelationships and leverage built upon leverage within the broad U.S. financial markets and industry. Failure in one area quickly would implode the entire system.

“No one has been through a crisis of the current magnitude for three-quarters of a century. Coming into the Great Depression, the United States was on the gold standard and enjoyed fiscal and trade surpluses, which offered some meaningful policy options to the government.

“Today’s environment has had the meaningful options fully depleted, leaving only gimmicks and the government’s ability to print money.”

U.S. markets finished higher yesterday, fueled almost entirely by Warren Buffett’s offer to “bail out” struggling bond insurers, just one of the areas threatening to implode.

The Dow gained 1%, the S&P 500 rose 0.7% and the Nasdaq ended unchanged.

But while most stocks enjoyed a Buffett-driven rally, the shares of the very stocks he offered to rescue absolutely tanked. Both MBIA and Ambac stocks fell 15% on the rumors that one, or both, had denied Buffett’s offer.

Ambac did, in fact, give Buffett the cold shoulder. His offer “would result in little to no net capital relief to support Ambac’s ratings,” the company complained. A closer look reveals why. The Oracle offered to take on $6 billion in muni bonds — classically stable investments — for a $3 billion fee.

Elsewhere in the world of super-sized bond investments, legendary bond house Pimco revealed this week that it has begun taking stakes in Bank of America and Citigroup.

“The fact that the banking sector has attracted fresh capital in the last couple of months is huge,” said Mark Kiesel, an executive VP at Pimco. “We’ve been playing defense for the better part of two years, and the question we’ve been asking ourselves is when to go on offense. In the banking sector, we’ve started to do that.”

Classic. These are vulture investing strategies from impresarios Berkshire and Pimco. Like a stunning round of 18, it’s fun to watch from the clubhouse, even if you’re not out on the links yourself.

U.S. retail sales rose 0.3% in January. Wall Street was looking for a 0.3% retail decline, but the Commerce Department says otherwise. Sales in January were driven almost exclusively by auto and gasoline sales. In fact, minus those two retail categories, sales during the month were flat.

Despite the Fed’s bravado on the subject, the big “R” still looms, but it’s not baked into the cake just yet.

The International Energy Agency (IEA) cut its 2008 global oil demand forecast this morning, blaming a coming U.S. slowdown. The IEA now expects the world to consume a mere 87.6 million barrels of oil each day, bringing annual consumption growth down to 1.9%. The IEA had predicted 2.3% growth earlier this year.

Should the IEA’s forecast come true, growth would shrink to its slowest pace since 2003. Light, sweet crude fell a buck, to $92.

Still smarting from his loss in international court, Hugo Chavez threw a tantrum this morning and cut off oil shipments to Exxon Mobil. Global oil traders greeted the news with little more than a yawn and a stretch. Exxon shares rallied over 1% on the news. Venezuela accounts for a very small percentage of Exxon’s business.

“This is not to defend China’s behavior,” writes a reader regarding China’s “gag order” to Olympians, “but please remember (or look up, if you’re too young) what happened to Tommie Smith and John Carlos at the 1968 Olympics in Mexico City when they dared to exercise their right of free speech to protest U.S treatment of African-Americans during a medal ceremony.

“Most countries view the Olympics as a public relations event as much as a sporting event, and they frown on any athletes who try to use the Olympics as a platform for political expression.”

“Man, I would call their hand,” suggested another. “The last thing China wants is an Olympics where no one shows.”

“Many thanks for the heads-up,” writes a reader, “from Kevin Kerr in today’s 5 regarding changing conditions in the wheat trading market and commodities in general. I took his advice and ‘secured’ some profits in DBA. Here’s hoping these timely posts from Kevin keep coming in The 5. As an Outstanding Investments
subscriber, I enjoy reading his updates there also. But The 5 is quicker.

The 5 responds: Our pleasure. Wheat continued to back off its recent $11 high overnight, down to $9 in Chicago.

In a related vein, retail prices of Maxwell House, Folgers, Yuban, and Chock full o’Nuts coffee brands were all raised this week. Both Kraft and Procter & Gamble, the parents of the brands, cited a rise in global demand for coffee thanks to a shortage of resources, falling output in Vietnam and energy costs. On average, prices will hop up about 10-20 cents per pound.

Be warned, this latest development could hinder production here at The 5.

Cheers for now,

Addison Wiggin,
The 5 Min. Forecast

P.S. Last week, we mentioned the act passed by Congress requiring “In God We Trust” be prominently displayed on all new dollar coins. When it goes into effect… it’s only going to make the “godless” dollar coins we told you about last month even more valuable. Good thing our friends at First Federal still have a few sets on hand, eh? If you’d like to investigate, do so here. Having read about the congressional act here, Nick has agreed to give readers of The 5 a special price, this week only.

Thanks, Nick.

P.P.S. Check this out… below are few of Steve Sarnoff’s Options Hotline winners from 2007. We calculate Steve’s track record on the highest possible gains returned by each recommendation. Thus, attaining gains this huge is a difficult task. Still, it’s easy to see… Steve has quite a winning streak going.

Granted, trading options isn’t for everyone, and neither is Options Hotline. But for the next 5 days, you can sign up for 4 free months of Options Hotline and give it a shot, on the house. Learn about our offer here.

• 300% on Bristol-Myers Squibb March $25 calls on Jan. 29, 2007
• 220% on American Standard April $45 calls on Feb. 26, 2007
• 165% on Monsanto April $55 puts on March 5, 2007
• 130% on Allstate April $60 puts on March 14, 2007
• 107% on Exxon Mobil May $80 calls on May 20, 2007
• 151% on Schlumberger August $80 calls on June 22, 2007
• 283% on TLT September $89 puts on June 12, 2007
• 122% on Target October $65 calls on July 12, 2007
• 225% on Intel July $22.50 calls on July 17, 2007
• 205% on Coca-Cola September $55 calls on Aug. 9, 2007
• 612%…and still counting on Newmont Mining Dec. $45 calls on Nov.8, 2007
• 114% on General Electric $40 calls on Oct. 2, 2007
• 366% on SPY $152 puts on Nov. 12, 2007
• 137% on Merrill Lynch $55 calls on Dec. 10, 2007.

• 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.

• Markets of the world endure massive sell-off… worst single day in decades
• Panic at the Fed! Bernanke cuts rates by 75 bps… evidence that traders are STILL unsatisfied
• Dan Denning with proof that “the other shoe is dropping”
• There’s always a bull market somewhere… cliche, but true. Our nod to a booming market off the radar
• In the mailbox… the CEO compensation debate rages on
• Plus, a Sundance update: I.O.U.S.A. getting rave reviews, standing Os… but we’re not out of the woods yet

Let your crash flag fly, baby…

While U.S. markets took the day off yesterday, the world’s investors decided to sell their stocks… and lots of ’em. After two trading days in Asia, most benchmark indexes are down about 10%.

In Hong Kong, the Hang Seng Index has tumbled over 14% in the last two days. Australia had its worst single day in 20 years early this morning, falling over 7%.

Likewise in Japan and China. The Nikkei 225 fell almost 6% last night alone — its biggest one-day drop in a decade. The Shanghai Composite fell over 7%. After nearly doubling in 2007, the Shanghai Composite has kicked off 2008 down 13%.

“There is no reason at all to allow the worries of the Western world to overwhelm us,” argued Indian Finance Minister Chidambaram yesterday. He chose to halt trading in Mumbai for an hour after sellers pushed the market down over 10% within minutes of the opening bell. Traders took his advice to heart… sort of. The Sensex managed to lose just 7.2%.

Europe fared only marginally better. Monday selling there was similar to Asia’s… British markets fell 5.5%, while France’s and Germany’s stocks lost about 7%. Today, however, unlike their Eastern counterparts, European markets have somewhat stabilized.

Now it’s America’s turn. Futures traders have sold the Dow down over 500 points… and most benchmarks are down 4-5%. Today is going to hurt.

But not if Ben Bernanke has anything to say about it. His brood at the Federal Reserve announced a surprise 75 point rate cut this morning — the biggest since 1984.

The fed funds rate now stands at 3.5%. The fed discount rate will also be cut by 75 bps, down to 4%.

Such is the Fed’s first emergency rate-cutting action since Sept. 17, 2001. Traders, it seems, are still unsatisfied… futures in Chicago are still pricing in a 100% chance of a 50 bps cut after the FOMC meeting next week.

In other words, the market wanted at least 100 bps today. Heh… Bernanke, we suspect, is having a tough day:

Bernanke: Another 100 bps from full-on fetal position

“Despite the carnage, I would remind you that market prices are just that,” asserts the unsinkable Chris Mayer. “They are not always well-reasoned opinions of value. As I go through our portfolio, I find a lot of value in what we own. I think we should stick with our picks. Now is really the time to build new positions…

“The other shoe is dropping,” asserts Dan Denning,
“the one that acknowledges that something is fundamentally different about the world.

“The price of money is going up. So is the perception of risk. One visible clue is the yen. It’s getting stronger. That’s bad news for emerging markets and speculative assets. Traders borrow in yen (where interest rates are low) to invest in higher-yielding assets like the Australian dollar. Yen strength means global investors are in full flight from riskier assets.

“As you can see above, the yen is getting stronger against a basket of foreign currencies, especially against the dollar and the euro. The stronger the yen gets, the weaker you can expect global stock markets to be. You can see that yen strength began right as the credit crisis hit in July.

“Since then, with one brief pause, traders have been getting out of risky positions and into… into what? That’s a question you might want to ask whoever runs your mutual funds.”

The dollar, surprisingly, is holding its ground. The greenback actually rallied strong up until this morning’s opening bell — the dollar index had risen to 77 on Monday. In theory, the Fed’s sudden 75 bps cut this morning should send the dollar index to the woodshed. But the index has held fast, falling only half a point.

Ambac’s credit rating has finally been cut. Fitch announced on Monday that it has chosen to cut the embattled bond insurer’s debt rating by two levels, from AAA to AA. If Ambac’s stock weren’t already toxic enough, now it may be unable to write top-ranked bond insurance… a practice that makes up 74% of its revenue.

Talk about bad timing… Bank of America and Wachovia both announced terrible fourth quarters this morning. Both banks revealed almost 100% drops in year-over-year earnings, thanks to the typical array of subprime losses, choppy markets and bad bets.

Seriously… could there be a better time to be shorting stocks? If you’re not on board with Dan Amoss’ new Strategic Short Report, you’re missing out on huge profit opportunities. Sign up here.

Yet as the world busts, we the eternally optimistic assert there must be a boom somewhere… and it’s in Mexico. Mexican real estate is set up for an incredible bull market: Despite six consecutive years of economic growth and global falling interest rates, only 6% of the nearly 26 million homes in Mexico are financed with mortgages. Here in good old I.O.U.S.A., 67% of homes are financed. Mexicans, it seems, subscribe to some pretty wild and crazy housing mentalities… most homes there are either inherited, bought outright with cash or built by hand.

Commodity prices have suffered wild swings as the world’s markets violently contract. Oil’s price has fallen down to 87 bucks per barrel on the probably broken theory that a U.S. recession would stifle demand. Light sweet crude now rests at six-week lows.

Gold sank with the rest of the world’s markets yesterday, opening as low as $850 this morning. But as we write, the shrewd are coming to their senses. Gold regained $40 in early U.S. trading… it now trades for $890.

“I love the idea that the check is in the mail from the feds,” a reader writes. “If what they say is true, they will be sending married couples $1,600 — that means that the wife and I will be able to pick up nearly two more nice shiny gold eagles. When you get lemons, make lemonade.”

The 5 responds: Amen.

“Was it not the U.S. Congress back in the 1980s that felt that CEO salaries should have compensation limits,” writes a reader, furthering our CEO salary discussion, “and therefore passed legislation preventing Corporate America from writing off as an expense CEO salaries greater than $1 million?

“I agree that there are a lot of overpaid corporate executives,” comments another reader, “but there are also a lot of overpaid people in other fields of dreams.

“Your reader who opined that CEOs are overpaid and that subsequently they should be paid on an average dictated by shareholders clearly does not like the free market or true capitalism,” opines our last reader.

“If you don’t like the high salaries that these guys are earning (while simultaneously steering their respective ships straight into the rocks), then don’t invest in the companies they control. If what they are doing is still too much for you to bear, then by all means short the stock.

P.S. During these times of true market crisis, there is simply no quicker way to hedge losses in your long-term portfolio than by shorting the market’s most hated stocks. Take action here.

P.P.S. We’re in the thick of things here at Sundance. While we’ve yet to land a distribution deal, we’ve had a couple of warm receptions, including a standing ovation at our screening in Salt Lake City on Sunday. indieWIRE.com, the independent film industry’s leading blog, called our movie “crucial viewing for anyone who claims to care about America.”

• Is recession around the corner? WSJ poll reveals surprisingly bad odds for the U.S. economy
• Existing home sales rise… but a closer look and a stroll down memory lane shows a housing market still in trouble
• More pain in the banking sector… Here come layoffs and another Abu Dhabi rescue
• Chinese pollution spiraling out of control… The 5 examines two industries still showing no signs of restraint
• Plus… our editors’ top picks for 2008

Thirty-eight percent of the economists in the U.S. agree with The 5 Min. Forecast … at least, according to poll results The Wall Street Journal published this morning.

The poll says 38 out of 100 economists think the U.S. economy will be in recession in 2008. That number is up 5% from last month’s poll. The same group of economic thinkers also drastically lowered their GDP forecast for this final quarter of 2007, from an annualized 1.6% down to 0.9%.

Of the economists surveyed, 96% thought the Fed would cut rates today. Most said by 25 points. This time, they were right…

As we were about to publish, the FOMC announced a 25bps rate cut, down to 4.25%. The Dow fell 200 points within minutes and the dollar was remarkably holding its ground… clear indications that traders had already baked in a 50bps cut. We’ll have plenty more to say in tomorrow’s 5 Min… stay tuned.

The pace of pending home sales crept higher in October, says the latest report from the National Association of Realtors (NAR). The NAR’s Pending Home Sales Index rose slightly from September-October — from 86.7, to 87.2.

While they were at it, the NAR revised their annual sales forecast… again.

For the ninth consecutive month and, by our count, the 10th time this year, the NAR lowered its 2007 existing home sales forecast, this time down to negative 12.5%. We’re officially calling BS. Making a 2007 forecast in the middle of December is lame enough… but when it’s your 10th revision in 12 months, it’s not even fair to call it a forecast. Not to mention…

For nostalgia’s sake, let’s see how the NAR began the year: “It looks like we’re moving beyond the low for the housing cycle last fall,” said David Lereah, NAR’s chief economist back on Jan. 10, “and buyers are responding to historically low interest rates and competitive pricing by home sellers. In addition, a tightening inventory of homes on the market is supporting prices.”

Days later, he and the NAR forecasted existing home sales to grow 1.5% in 2007, “despite all the doom-and-gloom stories and dire predictions.”

Heh.

Overall, the index is down over 18%, compared with October 2006 — one of the biggest year-over-year drops since the month following the Sept. 11 attacks.

But it looks like traders aren’t reading the fine print. The headlines read “Existing Home Sales on the Rise”… and that, coupled with the seemingly imminent FOMC rate cut, sent stocks into positive territory yesterday. The Nasdaq and S&P 500 rose nearly a percent.

Twenty-six of the Dow’s 30 components gained, for a day-end rise of nearly half a percent.

Gold held almost perfectly steady at the $807 mark overnight in Asian and London trading. As the metal hit New York this morning, we didn’t expect much action until after the FOMC released their decision.

The dollar, too, awaited Bernanke’s guidance.

Washington Mutual reported more subprime-related strife after the bell yesterday. The bank announced plans to cut their dividend to 15 cents a share, fire about 3,000 people and sell $3.7 billion of WaMu stock.

Any other year, this would be the story of the month. In 2007: stretch… yawn.

It looks like JP Morgan may be the next sovereign wealth fund (SWF) target, too. According to today’s New York Post, JP Morgan’s executives have recently met with the heads of Abu Dhabi Investment Authority and the Investment Corp. of Dubai to discuss what bank spokespeople call “mutual cooperation.”

You may recall JP Morgan’s recent $1.3 billion write-down… and you might also remember Abu Dhabi’s recent $7.5 billion cash infusion to rescue Citigroup. We suspect JP Morgan is looking for the same sort of “mutual cooperation.”

We wonder… how long until we can buy gas at the bank’s drive-through window?

Vladimir Putin announced yesterday that he would back Dmitri Medvedev, one of his proteges, in the next Russian presidential election. This morning Medvedev, who has almost zero political experience, announced that if he were to be elected, he would place Putin in the role of prime minister.

“It’s now all but certain that Medvedev will win,” Dan Amoss of Strategic Investment fame tells us. “Putin is manipulating Russian politics so he can control the government from behind the scenes after stepping down in March 2008.

“I doubt it’s a coincidence that Medvedev is also the chairman of state-controlled natural gas behemoth Gazprom. As a monopoly exporter, Gazprom can dictate terms to European gas consumers. I’m confident it will keep raising export prices substantially. It must, in order to fund the aggressive drilling program necessary to offset declining gas production at older fields.”

If Dan’s forecast comes to fruition, the Strategic Investment portfolio is already positioned to profit … take a look.

In a shocking trade development (sarcasm all ours), China and the U.S. signed 14 agreements and memorandums during the Sino-U.S. Joint Commission on Commerce and Trade today. The agreements, mostly involving food, drug and consumer product imports from China, seem largely aimed at smoothing over this year’s wave of tainted goods entering the U.S. from the red nation.

Also included was an agreement that “requires” China to bring more Chinese tourists into the U.S. Call us crazy… but we didn’t know there was any sort of Chinese tourist shortage here in the states.

In a similar effort, China also opened its largest “free-trade harbor” today. The Dongjiang Bonded Harbor Area, according to Chinese PR folks, will enjoy the most favorable taxation and exchange policies in the nation and also offer all sorts of international logistics aid to foreign visitors.

With their booming economy, the Chinese are wreaking havoc in markets all over the globe. Chinese demand for Christmas trees, for example, is causing a sudden price run-up in Germany.

Huh? Yeah, that’s what we thought too.

According to the German rag Der Spiegel, American-style Christmas decorations have become a twisted status symbol in China, and demand for holiday evergreens has gone through the roof.

“We don’t have enough goods to keep up with Chinese demand,” a German tree farm owner told the paper. Nordmann firs, the most popular among foreigners, are being shipped to Asia and the Middle East at unprecedented rates. Twenty-eight million trees were sold in Germany last year… that number is expected to increase dramatically this year.

Weird.

The Chinese trucking industry is out of control, too.

Chinese shipping trucks will wait at some gas stations for hours to get only a few gallons of diesel. Surging demand has forced the Chinese government to install rationing programs across the country.

According to The New York Times, the diesel fuel burned by trucks all over China has been found to contain more than 130 times the pollution-creating sulfur that the U.S. allows in its shipping vehicles. An estimated 10 million of such trucks are currently in service in China. Do the math…

“Woah!” Cries our oil man Byron King. “China is creating a long-term health disaster, with respect to pulmonary disease. People by the hundreds of millions are sucking those fumes every day. China could face a genuine lung cancer epidemic in just a few years.”

Yet China’s appetite for pollution seems far from unquenched. China’s coal demand is expected to rise by up to 8% next year, reports the China Coal Industry Association this morning. Coal isn’t exactly the cleanest fuel on Earth, and as you might guess, China doesn’t seem to care:

“Like the U.S., China is not party to the Kyoto Protocols on greenhouse gas emissions,” Byron says. “And thus, the CO2 emitted by China’s growing fleets of coal plants is not under any sort of international regulatory regime.

“The rest of world, including other developing countries such as India, would have to reduce its collective CO2 emissions by over 50% within less a decade just to match the now-outdated 1990 Kyoto emission levels. Well, there are few things that are certain in this world. But one of those certainties is that such a situation ain’t gonna occur, no way, no how.”

Editor’s note: We’ve been tracking global coal consumption incessantly. Byron’s recently made 30% on one of the U.S.’s best coal producers. Chris Mayer’s Special Situations readers just picked up an undervalued coal emissions reduction company. And Dan Amoss just closed out 25% gains by selling coal giant Peabody Energy.

You could receive all those recommendations, plus hundreds more, by subscribing to each individual publication. Or you could join the Agora Financial Reserve and receive all of our publications for one price… for life. We’ve thrown open the door to the Reserve for a year-end membership drive. You can capitalize on this opportunity right now, here.

The ZEW German business sentiment report showed German investor confidence at a 15-year low this morning. Ouch.

“The fellow who asked if you were ‘out to lunch’ is out to lunch himself,” says one reader, in response to yesterday’s reader mail. “His economic viewpoint is all too indicative of how the majority of people see the world (at least the ones I come in contact with). They incorrectly think the ‘government’ has a magic pot of money at its disposal to hand out when it finds people in ‘plight.’ They fail to comprehend the obvious; any ‘help’ the government gives out must first be confiscated from someone else, and of course, the government takes its cut!

“I pray this bailout does not come to fruition. Obviously, we should DIScourage the idiocy that has taken place recently in the residential real estate sector, not ENcourage more idiocy in the future by bailing these folks out. They will be much wiser if they feel the pain of their bad financial decisions. I can testify to that!

“I applaud your efforts to educate the world about the dangers of excessive debt and speculation. You and the other folks at Agora remind me that there are some other sane people in the world, so all hope is not lost!”

“Hank Paulson’s ‘plan’ is just a tactic to defer the looming/growing reset crisis past the U.S. elections,” writes another, with a cynical view of the plan, “and to create enough ‘hope’ of a bailout to keep financial companies from having to engage in even more write-downs over the coming four-six quarters. So long as there is a credible plan in play, the banks can use their ‘judgment’ to avoid the inevitable write-downs. And by judgment, you can be sure that Hank is making the rounds, getting top-level commitments to keep the real numbers out of the papers and the markets from melting down.

“Once the plan gels, I’ll bet we’ll have a new term — ‘own to rent’ — with zero amortization loans for our happy homeowners and a new form of senior secured debt held by Resolution Trust Corp. II. [RTC was the firm set up to bail out failed S&L companies after the last real estate meltdown].

“Will it be managed off the government’s books by Goldman Sachs? There won’t be any foreclosures now, just forced sales in five-10 years, after everyone has forgotten, as RTC II seeks to realize a return. RTC II gets the first proceeds of any sale, making an innocuous 8-10% on its slice, and then the original loan is repaid, and then the homeowner makes their ‘equity’ back… Goldman Sachs has probably got the paperwork ready already…”

The 5 responds: How did you come to such a dismal view of the financial world? Goldman Sachs and the administration would surely have your best interest in mind if they were to move forward on a plan such as this.

Regards,

Addison Wiggin
The 5 Min. Forecast

P.S. One feature you’ll enjoy as a member of the Agora Financial Reserve is the coveted Focus List … the top picks made by our editors each quarter. The current Focus List is on track to return 25-30% for this past quarter. Considering both the Dow and S&P suffered technical corrections over the same period, we’re doing all right, thank you very much.

Aside from paying a onetime fee for our services, Reserve members also receive the handy Focus List on a quarterly basis. If you agree with the trends and themes we follow in The 5 Min. Forecast, this is the easiest and least expensive way to put your money where our mouth is. Plus, you’ll get all the new services we plan to launch in the new year, free of charge. Gratis. On the house. Go ahead… get more details here.

• The 5 translates the latest “Fed speak”… stagflation still around the bend?
• Average Thanksgiving feast will cost 11% more this year
• Dollar visits new lows, pushes oil to $99
• How school teachers and firemen could be stung by an SIV sell-off.
• 1 in 10 hedge funds to fail, says industry insider

The Fed released the minutes from its last meeting yesterday. Apparently, the decision to cut rates was a “close call.” Only one member voted not to send the dollar to the depths of oblivion. The rest agreed to do so reluctantly.

During the meeting, the FOMC members “viewed financial markets as still fragile,” says the release, “and were concerned an adverse shock… could further dent investor confidence and significantly increase the downside risks to the economy.”

Translation: Subprime is a bigger threat to investment bank balance sheets than expected. One more piece of bad news and investors won’t be helping us buy our yachts anymore. That could, in turn, be bad for everyone else.

“With real GDP likely to expand below its potential over coming quarters,” the release continues, “recent price trends favorable and inflation expectations appearing reasonably well anchored, the easing of policy at this meeting seemed unlikely to affect adversely the outlook for inflation.”

Translation: The economy is addicted to cheap credit. Since subprime put the squeeze on credit markets, we have cut interest rates. So far, cuts don’t seem to be causing prices to rise too much for ordinary folks. But it’s likely to slow the economy down, a little.

The Fed lowered its 2008 growth forecast from 2.5-2.75% to 1.8-2.5%.

According to futures contracts, “investors” are betting a 92% chance the Fed will cut rates again on Dec. 11.

Yet the view from the cheap seats still looks like increasing inflation and slowing growth… stagflation, if you will.

“I’m going to go to war with the Fed!” decrees Chuck Butler, with our most outspoken critique. “Our central banker has lied to us! At the Fed’s last meeting, it told us the risks were balanced between growth and inflation…

“Hmmm… If that’s so… Then why did it lower its forecasts for growth next year and suggest that expansion won’t reach its trend rate until 2009? I’ll tell you why… Because it knew it all along, and was hoping to get this news swept under the rug.”

“Reasonably well anchored” inflation has driven the cost of the average Thanksgiving dinner up 11% this year, reported the American Farm Bureau yesterday. Prices rose over $4 per family, sending the national average dinner price up to $42.26 for a meal for 10.

This one won’t get a pardon…

U.S. stocks registered modest gains yesterday. The Dow and S&P 500 rose about 0.4% while the Nasdaq squeaked out a 0.1% gain.

The dollar, on the other hand, sank to new record lows. The dollar index found a new low at 74.9 this morning. The euro traded as high as $1.48 overnight, up over a cent and a half since Monday. The pound regained some ground of its own, climbing back to $2.06.

But the “carry trade” currencies grabbed the big headlines, once again. The yen rallied versus all 16 major trading currencies to 108 — a two-year high. The Swiss franc leapt to highs of its own. At 1.105 per dollar, the franc joins the club of current all-time highs versus the greenback.

And with another record low for the dollar came more record high oil prices. Oil traded as high as $99.29 yesterday, its all-time intraday high. Aside from the latest surge in dollar weakness, two significant refinery outages seemed to be all the news traders needed to propel oil prices to new highs.

As we write, oil has backed off its high to about $98 per barrel.

Gold prices went through the roof yesterday and overnight. Gold pulled itself out of its $775 gutter and rallied $30, to $805. Prices have now stabilized around $800.

The number of potential defaults on home loans “will be significantly bigger” in 2008 than this year, suggested Treasury Secretary Hank Paulson yesterday. Thanks for staying on top of things, Mr. Secretary.

Investment management monolith BlackRock will probably be the steward of the $75-100 billion SIV-saving superfund created by Bank of America, Citi and J.P. Morgan Chase. In the interest of “fairness,” BlackRock analysts will evaluate the prices of distressed SIVs entering the fund and ultimately decide when to sell them back to the market and at what price.

While BlackRock’s involvement is supposed to make this whole SIV superfund more impartial and objective, we’re yet to be impressed. For starters, 49% of BlackRock is owned by Merrill Lynch. And BlackRock CEO Larry Fink was practically the inventor of the mortgage-backed security… that’s what a normal person would call a “conflict of interest.”

The fund may be up and running by January.

“SIV debts could be a disaster for public investment pools,” Mish Shedlock of The Survival Report tells us. According to a recent Bloomberg special report, thousands of school, fire, water and other local districts in the U.S. are invested in state/county-run investment pools.

Many of such pools are infested with SIV debt once thought to be investment grade, but now suspected to be filled with subprime-backed securities. Public fund managers have historically modeled their funds after private money market funds… now the same toxic debt that plagues the likes of Citigroup and Merrill Lynch is jeopardizing in excess of $200 billion in public investment pools.

“The people managing those pools had absolutely no idea what they were buying,” says Mish. “No doubt they all thought they were geniuses, too, even as every single one of them blindly bought anything top rated as if there were no risk to the extra yield they were receiving.

“This is yet another painful lesson in the well-established concept of ‘there is no free lunch.’”

“No doubt this will lead to calls for government regulation of the rating agencies, when it was government sponsorship of the big three rating agencies that created the problem. This disaster for public schools is just another in a long list of reasons why it’s time to break up the credit rating cartel.”

Mish has created quite a SIV-proof portfolio for his Survival Report readers through a system of puts and shorts in the banking sector. Some are still below their “buy” price: [

Click here for more…

More than one in 10 of all hedge funds will go out of business this year, suggests Peter Clarke, CEO of Man Group — the world’s largest hedge fund manager.

“Historically, the hedge fund world has seen somewhere between 5-7% attrition rate in terms of funds closing or ceasing business; I would expect to see that, and this is a pure guess, of course, maybe reaching twice that,” suggested Clarke in this morning’s FT. Clarke expects the “quiet withering” of hedge funds to continue into 2008 as low performance and the worsening credit crisis dim investor interest.

Yesterday, we looked at some $38 billion in bonuses given out by Wall Street firms this year. Today, we’ve got another one… a signing bonus worth $15 million and then some.

Merrill Lynch’s new chief John Thain received a 1.8 million stock option/500,000 stock unit bonus for joining Merrill. At current share prices, that’s a $28 million gift. What’s more, if Thain can bring Merrill stock back up to its YTD high of $98, that bonus will grow to over $140 million. If he can’t, well… he’ll just have to settle with his $750,000 salary and $15 million cash signing bonus.

Where are the customers’ bonuses?

“You did not really answer the question,” opines a reader in response to yesterday’s discussion of Hugo Chavez. “Why do you call a democratically elected president a dictator? By the way, this is not a polemical question; I truly would like to understand why most journalists in America call him a dictator.”

“Chavez is a dictator,” writes another reader, inadvertently answering for us. “Anyone who thinks differently is obviously either a proponent of his form of Marxist/fascism (or is it fascist/Marxism?) or an ill-educated twit.

“President for life. Eliminate your protagonists using thugs and violence or confiscation by decree. Shut down any media that won’t parrot the Chavez line. Nationalization of value from those who have invested their money and efforts. Using the army and refusal to pay fair market value for the nationalized values.

“Chavez, like his mentor Castro, is a cheap, murdering, Latin American dictator from a long line of cheap, murdering, Latin America dictators. It is sad that the Venezuelan people will have to suffer for his ego.”

We’ll leave you to mull over this debate as you digest your holiday bird. If you care to comment, write us here. Otherwise, we’ll talk on Monday.

Happy Thanksgiving,

Addison Wiggin
The 5 Min. Forecast

P.S. Some breaking news from our small-cap research desk: One tiny company controls the technology that could be in 80% of new cars in less than a decade. A pair of recent contracts pushed the stock up 195% in the last four weeks…

It only gets more exciting from here — one small sector of the industry this company leads could grow 510-fold every year for the next 10 years. A respected transportation authority recently stated that 228,000 hybrid electric vehicles have been sold in the United States so far this year.

But — here’s the kicker — a major research firm has predicted that by 2015 — as many as 80% of all vehicles sold could be hybrid electrics! Our small-cap sleuth Greg Guenthner will be filling you in on details later today… look for them.