• 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.

• European bank takes Citigroup-sized subprime loss, announces first-ever yearly net loss
• Guv’ment to the rescue! Paulson peers into his crystal ball while Bush throws $170 billion at looming recession
• Global market rally… the surprising U.S. sector leading the way
• Major market forecasters call for Dow 18,500… details and The 5’s rebuttal below
• Plus, more from Chris Mayer on “the biggest economic story of the 21 century”

Swiss banking monolith UBS announced its first-ever yearly net loss this morning. It’ll close the books on 2007 down $4 billion.

Including today’s announcement of over $13 billion fourth-quarter mortgage-related write-downs, UBS racked up over $18 billion in such losses in 2007. Only Citigroup, with $21 billion, and Merrill Lynch, at $19 billion, can claim larger annual losses.

Spokespeople for UBS guessed 2008 would be “another difficult year.” We think they could be right…

But not if Hank Paulson and George W. Bush have anything to say about it: “After years of unsustainable home price appreciation, our economy is undergoing a significant and necessary housing correction,” Hank Paulson told Congress.

“The housing correction, high energy prices, and capital market turmoil are weighing on current economic growth,” he said. “I believe that our economy will continue to grow, although its pace in coming quarters will be slower than what we have seen in recent years.

“While we are in a difficult transition period as markets reassess and reprice risk, I have confidence in our markets. They have recovered from stressful periods in the past, and they will do so again.”

For his part, Bush affixed the presidential seal to the super-hyped “economic stimulus” package that wisped through the minds of Congress last week.

The president’s John Hancock formally brings the $170 billion bill into law. Practically every member of America’s lower and middle classes can now count on at least a $300 check from Uncle Sam sometime this summer.

There. That should fix this whole inflationary recession mess right up.

The U.S. stock markets staged a rally in support of “free money” politics. The Dow and S&P 500 rose 1.4% and the Nasdaq shot up 2.3%. Surprising retail growth launched markets into gains, while oil and energy stocks kept the party going.

“Consumers have continued spending,” reprises Chris Gaffney from his EverBank World Markets trading desk this morning, “with the advanced retail sales in January surprising the markets with an increase of 0.3%, versus expectations of a drop of 0.3%.

“But evidence is mounting that the plastic-fueled spending spree won’t last. In December, an average of 7.6% of credit card loans were either at least 60 days delinquent or had gone into default, up from 6.4% a year earlier. This trend is alarming, and with further weakening of the U.S. economy, consumer credit could become the next ‘big story’ to hit the markets.”

But who’s fussing about all that? Really. What a downer. Today, the Dow can now celebrate its first three-day winning streak of 2008.

And what’s this? Homebuilder stocks are on a roll.

While even the rosiest of optimists struggle to call a bottom to the housing market, Wall Street has officially labeled homebuilder stocks oversold… at least for now. The S&P Homebuilders Sector Spider (XHB) is up around 30% in the past month.

Even after the marketwide shellacking in early January, the ETF is up 7% year to date… particularly impressive given the S&P 500’s 7% YTD fall. Individual players like Toll Bros. and Hovnanian are up even bigger from early-year lows, 40% and 96%, respectively.

“What took us into this malaise will be what takes us out,” legendary fund manager Bill Miller wrote to his Legg Mason Value Trust shareholders. “Housing stocks peaked in the summer of 2005 and were the first group to start down. Now housing stocks are one of the few areas in the market that are up for the year.”

We must be nearly out the woods then, eh?

Maybe. S&P analysts downgraded another 66 CDOs yesterday, worth about $6.7 billion. The agency has now cut ratings on over 1,567 tranches… look for more write-downs from financials in the next wave of earnings announcements.

Still, glue-sniffing analysts from Morningstar released a three-year prediction for the Dow yesterday. They expect the U.S. benchmark index will rise 50% by 2011, to 18,500.

Their logic? “The Dow was trading at a very hefty 17% discount to our estimate of its fair value,” writes Morningstar’s Jeffrey Ptak. “The Dow hasn’t looked this cheap to us since September 2002, when the index stood at 7,592 (three years later, it had risen to 10,569).

“When we take the Dow’s market price and fair value estimate together with its 9.7% weighted average cost of equity… it translates to a 17% annualized expected return. In other words, this is the return an investor would reap if the prices of the Dow’s components converged to our fair value estimates over a three-year holding period.”

Sounds peachy, doesn’t it? “Fair value” is, of course, in the eye of the Morningstar beholders. But here’s the real gem of the forecast:

“Notice… we’re not guesstimating the short-term direction and level of interest rates, the trajectory of the dollar, the size of the trade deficit and so forth. Nor are we shortcutting our way to a forecast by, say, ginning up an aggregate earnings growth projection or trying to handicap where earnings multiples and yields are likely to settle in three years. Methods like these are notoriously imprecise. So we don’t use them.”

We love it. If it’s imprecise, get rid of it. And why not? If we’ve learned anything from the past 12 months, it’s that the Fed, the dollar, trade deficits and earnings have nothing to do with stock prices. Nothing at all.

If you’re a subscriber to Morningstar and you buy this line of reasoning: Good luck.

There was some good news about the trade deficit this morning. The U.S. December trade deficit came in at $58.8 billion — a good $5 billion below expectations. Those numbers make 2007 the first year since 2001 that the U.S. did NOT break its own record-high trade deficit reading. The trade deficit fell 6.2%, to a wee $711.6 billion last year… the largest decline since 1991.

On average, every American man, woman and child spent $8,350 on imported goods in 2007.

Sen. Chuck Schumer, God’s “gift” to American protectionism, threatened legislation yesterday that would limit the investment powers of sovereign wealth funds.

“Sovereign wealth funds need to assuage concerns that they will manage their investments in terms of political or economic power objectives,” Schumer declared unilaterally. “The alternative I fear is restrictions on sovereign wealth fund investments in the United States.

“The initial focus of Congress is correctly on the transparency of these funds and whether that is best achieved voluntarily working through the IMF or, if that doesn’t work, through legislation. My preference would be for the former, but we may have to consider the latter.”

Renewed U.S. market mojo spread across the Pacific last night, as practically every Asian market enjoyed handsome gains. Japan fared best… news of Japanese GDP growing twice the rate expected shot the Nikkei 225 up over 4%.

For what it’s worth, Japan’s economy is now growing at a 3.7% annualized pace, nearly four times as fast as the U.S.

Australia’s benchmark index rose well over 2%. The Hang Seng soared to 3.6% gains, while the Shanghai Composite crept up 1.1%.

India’s recently bombarded Sensex recovered some of its losses yesterday… due, no doubt, to readers of The 5. As you may recall, we released an embargoed report on India’s “Golden Quadrilateral” yesterday… boom! …the Sensex jumped up over 4%.

“I have lived in India for two months,” responded a reader immediately after the report’s arrival. “I would be very careful about investing there for the long haul. Even the ocean near all big cites stinks like excrement. The roads and transportation systems are badly underdeveloped. Their rivers are really still mostly sewers. The main glacier in the Himalayan mountains that provides all the water for the entire Ganges River will be all gone in two decades. There are not enough new roads to handle the new $2,500 cars made in India that people will soon be buying by the millions.

And you thought your morning commute was bad… traffic in Mumbai

“Industrially young countries are like people: They evolve in the same way. India and China are in many ways like the young industrial U.S. was between 1880-1929. The U.S. had five depressions in that period. China and India may well precipitate a worldwide depression in 2011 economically and especially environmentally.”

The 5 responds: “Heh,” writes Chris Mayer, recently back from his investment tour there, “I can attest to the pollution. The air quality in India is stifling in the big cities. And walk by any open body of water and the smell is overpowering. I can also attest to the bad roads. It took me nearly six hours by car to get from Jaipur to Agra on poor roads where people, ox carts, camels and oncoming cars seemed to wander everywhere.

“But having said all that… everyplace has its problems, and therein lies the opportunity. India already has embarked on a massive road-building project. Numerous companies and projects are in the works to capitalize on India’s water issues.

“Of course, India is a volatile market. It’s not for the faint of heart. Nasty corrections and spills are inevitable. But I feel pretty good about the long-term picture. It’s like the toothpaste is out of the tube. India — nor China, for that matter — is not going to retreat back into its shell. And the impact of its joining the global economy is the biggest economic story of the 21st century so far.”

Don’t miss Mayer’s full report on India, including the only three stocks you need to add to your portfolio to capture lasting gains there. It moves markets.

“As you noted,” writes another reader, unveiling an oddity about the retail numbers that sparked a Wall Street rally yesterday, “absent gasoline and auto, January retail was 0%. Why, then, don’t they have a ‘core retail’ number to go with ‘core inflation’? And if the economy is doing so well, why don’t they express retail sales in units other than inflated Bush dollars? Excluding food and energy sales, I would guess that retail was down a lot.

“What is the real situation at Wal-Mart and Macy’s? Did they sell more clothes, more jewelry or more accessories? I spent a lot more in retail last month than I did in January ’07, but I didn’t eat any more eggs, meat, cheese, milk, lettuce or apples, and I did not drive any farther to get to and from work, though it cost over $60 to fill the tank. I am now back to reading the weekly grocery store advertisements before I decide where to shop.”

The 5 responds: Hmnn. Why would the government alter data that would make it seem less capable? Heh.

For the record: Wal-Mart reported a 0.5% increase in same-store sales… no doubt an effect of rising costs, as you point out. January sales slowed to 0.2%. Macy’s, on the other hand, announced a 7.1% decline in January sales this week, laid off 2,300 employees and had its credit rating reduced to BBB- by S&P.

Happy Valentine’s Day, shoppers,

Addison Wiggin
The 5 Min. Forecast

P.S. Volatile markets like the ones we’ve seen so far in 2008 are a dream for options traders. As we reported yesterday, recommendations made in Options Hotline by Steve Sarnoff have gone up as much as:

• 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 December $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.

Steve had no less than 13 triple-digit winners in 2007. So we’re keeping our eye on him in 2008 too. If you’d like a trial run with Options Hotline, you can give it a go here.

• Bush reveals his final budget… really, has he lost his mind?
• Jim Rogers on why he’s “extremely worried.” Plus, the buying opportunity that has him “gearing up”
• Markets stage best week since 2003… John Williams on what may be around the bend
• Ed Bugos with 11 damn good reasons to buy gold
• Kevin Kerr on the latest booming commodity… and how it could wreck your Valentine’s Day

Bush must be pathological. There can be no other explanation.

After chastising Congress for earmarks and pork barrel spending in his State of the Union address last week, the president unveiled the first ever $3 trillion budget proposal today. $3.1 trillion to be exact, but who’s counting the extra billions these days?

The man who once promised a more humble foreign policy and championed “compassionate conservatism” is now responsible for the first $2 trillion (2002) and $3 trillion (2009) government budgets… which is nothing short of incredible. It took his predecessors 200 years to reach the first $1 trillion in 1987.

What’s more, after repeating his promise to balance the budget by 2012, Bush announced the second and third largest deficits in the nation’s history. The $410 billion deficit projected for this year and the $407 billion projected for 2009 will be surpassed only by his $413 billion deficit four years ago. By what fuzzy math this is heading toward “balanced,” we cannot even hazard a guess.

“These are not insignificant changes,” Paul O’Neill comments in I.O.U.S.A. of Bush’s uncanny ability to add to the national debt. “These are monumental changes.”

“When you’re no longer able to service your debt,” O’Neill warns, “you’re finished.”

• Scary new foreclosure stats, same old State of the Union… how America has become its own worst enemy
• How long do you hold your stocks? New figures reveal buy-and-hold gives way to churn-and-burn
• The 5’s own “economic stimulus” plan: Clone Britney
• Loonie back at parity… Chuck Butler on the future of the Canadian dollar
• Chavez back in the news, aims to form multination military alliance versus U.S.
• Consumer confidence at fresh lows, gold at new highs and more!

More than 405,000 homeowners lost their homes to foreclosure last year.

Total filings, according to RealtyTrac, were up 97% year over year in December, bringing the yearlong increase up 75% from 2006. More than 1% of all U.S. households were in some form of foreclosure in 2007.

“I would argue,” says David Walker, the U.S. comptroller general in the opening lines to I.O.U.S.A.
“that the greatest threat to our nation is not someone hiding in a cave in Afghanistan or Pakistan, but our own fiscal irresponsibility.”

You wouldn’t get that impression from the State of the Union address given by George W. Bush last night. He mentioned the nation’s deficit only once, and even then only repeated his pie-in-the-sky projection that the deficit would be down to zero by 2012. Bush didn’t mention the word “debt” once… even though our national IOU just crossed the $9 trillion threshold.

As we pointed out last week, even by Congress’ own measures, the deficit is on track to increase by $219 billion in 2008… not including off-budget spending for the wars in Afghanistan and Iraq. And not including the economic “stimulus” package Bush begged Congress to pass.

Bush spent 16 minutes — 30% of his entire speech — talking up the “war on terror” in Afghanistan and Iraq.

“If we had been running our economies the old-fashioned way,” the venerable Stephen Roach said at the conclusion of the World Economic Forum in Davos last week, “for example, were saving and consumption funded by income, maybe we wouldn’t be in this mess we are in now.” The subprime fiasco, says Roach, “will dwarf the dot-com slump.”

“It is one thing to punish a few speculators with skin in the dot-com game,” added our friend Bill Bonner in The Daily Reckoning yesterday. “It is quite another to deliver a stern lesson to America’s entire middle class. The latter never liked school.

“Spending on information technology was barely one-sixth the spending on house building. But that’s only the beginning — because the dot-com bubble didn’t cause millions of householders to think they were a lot richer than they really were. It didn’t lead millions of families to borrow and spend far more than they could afford. And it didn’t entice bankers and investors into billions of dollars worth of losing positions.

“A word to the wise: You can’t really make people wealthy by resorting to ‘Zimbabwe economics.’ A society grows rich by producing things… and saving money. There is no other way. Cheaper credit won’t do it. More consumption won’t help. Printing money — and dumping it from helicopters — is a losing proposition.”

Markets kicked off the week with a nice day of gains yesterday. The Dow and S&P 500 opened to a sell-off, falling as low as minus 0.5%. But stocks surged back, led almost entirely by financials, to notable gains.

The S&P 500 ended up 1.7%, the Dow rose 1.4% and the Nasdaq managed a 1% gain.

“The average holding period for a stock on the NYSE is just nine months,” notes James Montier in our friend John Mauldin’s Outside the Box e-letter, commenting on the true speculative nature of the U.S. economy.

Investors in the U.S. markets are fixated on the short term — more so now than ever before.

“Of course,” Montier concludes, “if everyone else is focused on the immediate future, mispricing of the long term may well result.

“If you are investing on a nine-month time horizon (see chart above) then your returns are likely to be dominated by price returns. You are simply betting on whether a stock goes up or down. In fact, the capital gain delivered via the change in valuation accounts for some 62% of your total real return.”

“Do you know what the highest-rated show on CNBC is?” asks our Maniac Trader Kevin Kerr, as if to put a point on the subject. “Jim Cramer’s Mad Money? Closing Bell? Fast Money? Kudlow & Co.?

“None of the above. The highest-rated show, by far, is the game show Deal or No Deal, on which people try to guess which briefcase has the most money.” Fast, easy money and scantily clad women… what else is on the minds of the gaming public these days?

Given the above, we have an alternate suggestion for economic “stimulus” … let’s clone Britney Spears.

According to Portfolio magazine, Ms. Spears, loony as she may be, accounts for $120 million of the U.S. GDP each year. She has sold about 83 million records, grossed over $150 million touring, over $100 in perfume sales, and netted $10 million-plus in advertising.

Paparazzi firm X17 sold $2.5 million worth of Britney photos in 2007 alone… the magazine estimated that photos of her account for at least 20% of the entire paparazzi industry. Her face on the cover of gossip magazines boosts sales by an average 33% — newsstand sales of mags with her on the cover amounted to $360 million in the past year and a half.

She’s been Yahoo’s No. 1 search term six of the last seven years. Just another hundred Britneys or so, free cameras from the federal government and we’re in the clear…

The U.S. dollar fell yesterday and overnight. The dollar index slipped to the lower side of 75, accelerated mostly by a surging euro — up to just a hair from $1.48. The pound is in similar shape, trending upward to $1.99. The yen is ever so slowly letting go of its recent rally, trading at about 107.

The Canadian dollar, on the other hand, refuses to let go of parity with the greenback. But at a dime off its November all-time high of $1.10, it’s most likely in the pits until commodity prices rebound.

“The loonie has seen better days, for sure,” writes our friend Chuck Butler, watching currencies closely. “But let’s not get too down on it. I recall, not too long ago, when the loonie was trading at 65 cents! It’s now trading near parity.

“The short-term problem is that the loonie is getting tugged on both ends. The Bank of Canada’s rate cuts and the idea that Canada gets tarred with the same brush as the U.S. are trying to pull it down, while rising commodity prices, and a strong economy, are trying to pull it higher. Which one will win? That’s for the markets to decide, my friends.”

We’ll let you know as soon as something gives.

Orders for durable goods in the U.S. rose 5.2% in December
– the biggest leap upward in five months. Orders for big-ticket items meant to last more than several years, says the Commerce Department, doubled analysts’ expectations. The number is especially surprising in light of the ISM’s manufacturing index current four-year low.

Still, for all of 2007, durable goods orders rose 0.9%, a might bit slower than the 6.3% jump in 2006 and the 9.4% gain in 2005.

Consumer confidence fell in January to two-year lows. After a slight increase in December, the American consumer resumed his gloomy outlook in January, sinking the Conference Board’s index to a post-Katrina low of 87.9.

“We have to do everything possible,” urged our favorite South American dic… er… president, Hugo Chavez, to Latin American leaders this week, “so that in the coming years, the U.S. empire falls.”

Chavez called for all Central and South American countries to begin withdrawing the billions of dollars they hold in reserve in U.S. banks. And as plenty of other nations are doing without his insistence, Hugo wants his Latin allies to sell whatever U.S. Treasuries they might own because, well, “You can’t put all your eggs in one basket.”

Mr. Chavez added to that sentiment today by suggesting that Nicaragua, Ecuador, Bolivia, Cuba, the Dominican Republic and Venezuela create one united anti-U.S. military alliance. That no doubt would be interesting.

We wonder where Chavez is going to get fodder for his tirades when Bush leaves office a year from now.

“I see you, puny imperialists, I see you… ha ha ha!”

Gold reached another record high this morning, climbing as high as $933 per ounce. Platinum hit an all-time high as well, up to $1,738 per ounce.

“What caught my eye this last week,” writes a reader, “was your story of China becoming the world’s No. 1 in gold producer in 2007. My wife is Chinese and was born there. When I told her this, she was surprised about how production has grown.

“No matter what happens here in the U.S., I believe China will drive the price higher and higher.It’s the right thing to do if you were the largest producer of gold last year.

“So make sure you buy some more gold today.”

Countrywide CEO Angelo Mozilo announced yesterday that in light of his role as the spearhead of the greatest housing bust since the Great Depression, he’ll forfeit $37.5 million of his severance pay. The poor guy will now be stuck with a measly $24 million pension.

“Why are the very engineers of this mess,” asks another reader, “not personally held responsible?

“If you are an engineer, trained to be an engineer, and you build something that collapses due to your own inability, being an engineer, a matter expert, you are held responsible for your work.

“While taxpayers eventually end up paying, the CEOs of Citicorp, Merrill Lynch, Bear Stearns and all the other Harvard, Stanford, Princeton, etc.-trained CEOs of the very financial companies that designed and executed this disaster are walking away with millions upon millions of dollars in severance packages, bonuses and stock options while the little guy on the street has to bail out what’s left — while having to deal with the economic downturn on top of that.

“It’s not just evil — it’s plain wrong. It might be legally correct, but it’s still wrong, wrong,
wrong.”

“Addison Wiggin, Bill Bonner, Chris Mayer, et al.,” suggests a third, “are to be congratulated on what — and how — you report what’s REALLY going on in the financial world!

“Years ago, I stopped following the advice of all the ‘experts’ on CNBC and other idiotic TV stations, especially after big losses on Motorola and Qualcomm. Now I follow your advice… and lo and behold — despite of what happened last year — I came out about 26% ahead of the experts!

“Thank you for what all of you are doing, and keep up the good work!”

The 5 responds: OK, we couldn’t help but publish this last one. (Bashful fluttering of the eyelashes.) Thank you for reading… and good luck. It’s a speculative world out there.

Cheers,

Addison Wiggin
The 5 Min. Forecast

P.S. Tonight at 5 p.m., we’re going to publish Dan Amoss’ special report on which stocks are likely to get hammered next in the subprime fiasco. If you’re interested in his “paddle strategy” for investing in these uncertain times, now would be the correct time to act. Learn more here.

• First major Wall Street bank flies its recession flag… with surprising candor
• The White House’s latest mind-numbing plan… economic strategery at its finest
• Another skittish day for markets… Dan Amoss on what to expect in 2008
• Bear Stearns CEO gets the ax — plus, a final body count for the 2007 mortgage layoffs
• Gunner on a silver play set to soar
• Plus, readers set our Citi record straight… details below

A recession in the U.S. “has arrived,” reports Merrill Lynch this morning. “According to our analysis, this isn’t even a forecast any more, but is a present-day reality.”

“To say that the backdrop is ‘recession like,’” Merrill asserts, “is akin to an obstetrician telling a woman that she is ’sort of pregnant.’” What a refreshingly mordant statement for a Wall Street bank. Makes our coffee taste that much better this morning.

And what’s this? President Bush appears to agree … umn, we think.

“Recent economic indicators,” he told a coalition of the mind-numbed yesterday in Chicago, “have become increasingly mixed.” It’s comforting to have such convincing leadership… this coffee is really good this morning.

“Core inflation is low — except when you’re going to the gas pump it doesn’t seem that low; or when you’re buying food it doesn’t seem that low. Core inflation is low, but energy and food prices are on the rise — have risen.”

And he knows this because he goes to the pump himself… and buys his own food. Oy.

At least there’s the cheery bright side to the president: “I had a New Year’s resolution,” he told the crowd, exhibiting his boyish charm, “and it was to make sure that Congress keeps the taxes low and to make sure that when we spend your money, we do it wisely or not at all.”

Yet… according to the Congressional Budget Office yesterday, the U.S. government posted a $107 billion budget deficit in the first fiscal quarter of 2008 — up $27 billion from the same time last year.

Oh, well, we pledged to stop drinking wine by the bottle this year, too. That hasn’t really panned out for us either.

“Over the next two years,” added Treasury Secretary Hank Paulson at the same time, “we face an unprecedented wave of 1.8 million subprime mortgage resets, raising the potential of a market failure.”

Secretary Paulson publicly pleaded with Congress to increase oversight of Fannie Mae and Freddie Mac, reform the Federal Housing Administration and provide rescue refis to those mystical 250,000 subprime borrowers who are not too poor, but not too rich, who can’t afford their homes, but aren’t yet late on payments.

Congress does such a great job with their own books… let’s put them in charge of cleaning up the worst financial crisis to face the country since Nixon yanked the dollar out of Bretton Woods. Good thinking, Hank.

U.S. markets traded skittishly all day yesterday. From the look of this chart, it doesn’t seem as though there’s much confidence on the trading floor:

By the closing bell, most benchmarks ended close to where they began.

“2008 is off to a rocky start,” Dan Amoss warned readers of Strategic Investment yesterday. “Gold stocks sprinted upward in the first two trading days of the year, but the market started punishing most other sectors right out of the gate. In the coming weeks, many professional money managers will readjust their portfolios for 2008. Most will cut exposure to industries facing significant head winds and add exposure to industries with sustainable earnings momentum.

“We should get more defensive by avoiding stocks and sectors with more downside. I expect it will be harder than last year to find stocks with huge upside…”

James Cayne, CEO of Bear Stearns, got the ax yesterday. According to The Wall Street Journal, Cayne will soon resign as CEO, but still retain a seat on Bear’s board.

Cayne oversaw all sorts of memorable issues at Bear last year… from the insolvency of two multibillion-dollar funds that basically triggered the financial meltdown to a 50% fall in BSC stock prices.

But at least he left on a high note… news of his retirement shot BSC stock up 2.3% in afterhours trading.

Nearly 90,000 mortgage jobs were lost in 2007, reports MortgageDaily.com yesterday. According to its survey, at least 86,000 jobs were lost in the 205 mortgage companies surveyed.

Angelo GodMozilo took the prize for 2007’s biggest ax wielder. The Countrywide CEO was “forced” to cut 11,665 jobs, or about 14% of his entire work force. He took home about $142 million in total compensation during the same period… that sounds about right.

Elsewhere, California had the most mortgage-related firings (16,000), led by the complete folding of New Century Financial Corp.

The real head-scratcher proved to be JP Morgan Chase, which added 4,465 mortgage-related jobs. Huh?

“Don’t look now,” reports our friend Chuck Butler straight from his EverBank World Markets trading desk, “but eurozone inflation is rising — up 3.1% in November. Whoa, Nellie!

“Given oil prices, and that the European Central Bank (ECB) would have to drag its feet to cut interest rates.”

Chuck suspects the ECB will be forced to raise rates soon. “What else can they do?” he asks, throwing his hands wildly into the air. “They have a mandate from the Maastricht Treaty to maintain price stability… not promote growth, like some willy-nilly central bank might want to do. This really puts ECB President Trichet in the hot seat…

“Should the ECB decide to raise rates and the Fed decide to keep cutting rates, the euro would enjoy a positive rate differential. You think the euro was popular as an offset currency to the dollar before? Wait till that happens!”

The euro is trading at $1.47 this morning. The pound, still under $2, is at $1.97. And the yen is a fetching 109.

According to U.S. officials, Iranian speedboats got too close to American battleships in the Strait of Hormuz yesterday. Apparently, there was some gesturing and threats. The media tried their best to make it sound like World War III was imminent. Secretary Rice did her part by labeling the incident “provocative and dangerous” and warned that the U.S. “will continue to defend its interests in the Gulf.”

But at the end of the day, oil traders stuck to the real news and blew this off… Oil lost $1, to $96.

Gold shot through the roof in European trading this morning. Gold has been trading tightly around $860 this month, but within minutes of opening on the London exchange this morning, prices jumped to a new record high of $876.

“One of North America’s oldest silver miners is about to become the world’s largest,” reports our small-cap adviser Greg Guenthner. “By 2009, Coeur d’Alene Mines will join the ranks of Silver Wheaton Corp. and Pan American Silver Corp. as one of the top silver miners on the planet. Thanks to a merger Coeur completed last month, this junior mining company expects to produce 29 million ounces of silver in 2009. That’s more than anyone else in the world.

“But despite Coeur’s exciting growth profile, its share price languishes… at the current quote of $4.58 per share, the stock seems very, very cheap.”

For a more detailed analysis of Coeur d’Alene, check out Gunner’s piece in this morning’s Rude Awakening.

“I work at Citi,” a reader writes, correcting our coverage of Citi’s withdrawal restrictions yesterday, “although not in the retail banking area…

“The facts are that a few ATMs were rigged by scam artists to enable them to get the account numbers and passwords of people using those machines.

“While this was a big inconvenience to customers, especially at Christmas time, when people are taking out cash to pay their year-end tips to the doorman, etc., it enabled the bank to avoid large losses.

“Limiting the withdrawal amount would have VERY little impact on the bank’s capital position.”

“As a Citibank customer,” adds another reader, in reference to a wire transfer limit issued by Citi, “I can tell you that those were my thoughts exactly the moment we got the notice. And by the way, they weren’t all that vocal about giving that notice themselves. It was barely a whisper of an announcement.

“We noticed it, though, because we regularly make large wire transfers from Citibank in the U.S. to our bank account — about $11,000 at a clip, every three months. I called the bank a bit panicked, thinking we’d need to make a heck of a lot of wire transfers to make up the difference.

“But it turns out the restriction is on a different kind of fund transfer. Wire transfers — with a fee — you’re still permitted, up to a daily limit of something like $50,000. Nonetheless, it spooked us enough that we finally went ahead and started doing what we’ve said we should do for a long time… move everything to another bank.

“We’re in the process of moving the rest of our money out of Citibank to another bank (with, supposedly, less subprime exposure).”

Regards,

Addison Wiggin
The 5 Min. Forecast

P.S. You’re got less than a week to sign up for your three free months of Energy & Scarcity Investor. Free with your trial is Byron King’s latest small-cap energy pick: the only “pure play” on California’s government-forced explosion in renewable energy. You can learn all about it here.

U.S. GDP grew at the fastest rate in four years during the third quarter, the Commerce Department confirmed today. The gov’mint said the economy grew at a robust 4.9% during the quarter, the same GDP it had estimated last month. Exports drove results, rising over 19% in the third quarter.

From a market perspective, the third quarter looked far from robust

“Experts” have predicted wildly lower (read: rational) GDP in the forth quarter: about 1.5% or less. We’ll let you know the details when they arrive.

“Money Pros Still Optimistic About Stocks,” read a WSJ headline yesterday. Whoever “money pros” really are, they seem to be a hardheaded group. More than 75% still cling to the optimistic scenario — that the stock market will post a gain in 2008. Thirty percent of those surveyed think it’ll rise by more than 10%.

The Fed injected $20 billion in 28-day loans into our “robust” economy in their much anticipated fund auction on Monday. According to the data the Fed released yesterday, 93 anonymous banks lined up for the auction, requesting more than $61 billion in loans. Those who were given a loan did so at a 4.65% interest rate, only one-tenth of a percent lower than the Fed’s current discount rate.

The dollar furthered recent gains overnight. Since we called a dollar rally on Dec. 3, the greenback has been knocking its rivals to the canvas. This week’s trading has been no exception. The euro is at $1.43 and still trending down. The pound has fallen below $2, to $1.98.

Bear Stearns revealed the worst quarter in the company’s 84-year history this morning. The country’s fifth largest investment bank lost $859 million in the fourth quarter, its biggest loss ever.

“Financial innovation is great,” says Sheila Bair, the recently crowned chairman of the Federal Deposit Insurance Corp., “but you have to have some basic rules. One of the most basic rules is that a borrower should have the ability to repay.” Seems fairly obvious.

“What a joke,” explains Kevin Kerr after reviewing the energy bill passed by President Bush yesterday. The wide-sweeping bill has its fair share of bright spots, such as increasing the required vehicle fuel-efficiency to an average of 35 miles per gallon by 2020. But it was this facet, as summarized by CNNMoney, that drove us to an extra drink last night:

“[The bill] requires refineries to increase the use of ethanol from about 6 billion gallons a year this year to 36 billion gallons by 2022 and mandates that by then at least 21 billion gallons are to come from feedstocks other than corn.

“Bush praised that provision, which would spur the development of ethanol from cellulose feedstocks such as prairie grass and wood chips.”

In other words, Bush mandated a sixfold increase in ethanol production, including up to a 150% increase in corn-based ethanol production. Oh yeah… and you’ve got to find a way to make energy out of dead hunks of wood and grass, and make it nearly twice as big as the whole ethanol market.

Fuel of the future?

“Wood chips?” asks Kevin, “Forget ’em. Switch grass is also no solution. It is not a crop you can rotate, and basically, it takes three years to get any yield. Since it can’t be rotated, those fields are toast once you plant it there… farmers will love that.

“When you read this mandate, you also have to wonder where all the water is going to come from, and the fertilizer, land, etc… Pure insanity.”

Russian oil monolith Gazprom has just begun extraction from its last known gas field – the Yuzhno-Russkoye field. Huh? Last time we checked, Russia had more gas fields than it knew what to do with.

“This one field is equivalent to a year’s worth of production in Russia,” our oil adviser Byron King tells us, “but this is the last of a long series of Soviet-era discoveries, developed over the past half-century. There are no others like it, by Siberian standards — meaning relatively shallow and relatively near.

“The Russians like to brag about their immense natural gas resources, and there is a lot of truth to the claims. But the only way that those resources will ever get to market is if Russia keeps up an aggressive level of investment in distant and harsh terrains and climates. Russian industry has to go further and drill deeper to recover that nation’s remaining gas resources. But the question for the world is whether or not Russia can maintain the necessary pace.

“In the future, the gas will come from deeper wells, even further afield,” Byron tells us. At the Offshore Technology Conference in Houston earlier this year, Byron checked out one Russian project that will be moving oil and gas from 360 miles offshore, deep under the Arctic Ocean, to land. (That is the distance from Cleveland to New York.) “Yes, the technology is there to accomplish such feats,” he says, “but the prices at the burner tip will have to reflect this level of sophistication and investment.”

If you’re looking to invest in this sophisticated (and complicated) future of energy extraction, look no further than Byron’s Outstanding Investments.

Milk prices have risen over 23% this year, to a national average of $3.80 per gallon, the Department of Agriculture reported this morning.

“Great job, guys,” writes a reader in response to yesterday’s mailbag. “You know you are doing a good job when zealots come out of hiding to challenge you. Too bad he doesn’t understand that your comments are meant to challenge the status quo and encourage an environment of openness and honesty.

“I only wish that my fellow Canadians would do the same here. Perhaps when that occurs, we could then dispense with our maternalistic crib-to-death type of government and political system that exists in this country. Hmmm, I guess that means politicians would have to develop a characteristic called integrity? Not!!!”

“Well,” writes another reader, with half the intelligence of our Canadian friend above, “maybe you have spent absurd amounts of time telling everyone about fiscal responsibility, the demise of the dollar, Chicken Little stories, etc., all the while keeping your readers informed.

The 5 responds: Uh… it may be foreign to some, but we live in Baltimore.

P.S. We may live in Baltimore, but we’re writing to you today from a hotel room in Nashville, Tenn. We were granted an interview with Arthur Laffer for the movie this morning. He’s been a fossil collector for some thirty years. In his office he has fossils of prehistoric fish and birds… Terracotta soldiers from China… and a couple of species of live carnivorous turtles who we had the pleasure of watching devour gold fish for lunch.

• China tries again to cool white-hot market… Shanghai Composite set to nearly double in 2007
• John Williams on a data point found only during recessions… and last week
• Blackstone to join forces with Chinese government? The Rio Tinto saga takes a wild turn…
• Mayer and Hancock tag-team the booming opportunities in Asian real estate
• Readers chime in on the subprime bust and new Bush-backed bailout… plus The 5’s take below…

This morning, the Chinese government made another attempt to cool down their bubbling economy. The central bank raised the required reserve ratio (RRR) — the proportion of cash banks are required to keep on hand — for the 10th consecutive time this year.

Under normal conditions, hiking the RRR has a cooling effect on the stock market. Not so in China. An RRR of 14.5%, the highest in China since the mid-1980s, barely gave buyers pause. The Shanghai Composite (SSE) rose a full 1% on the news.

Despite a hefty fourth-quarter correction, the SSE is still looking to return 90-100% this year.

Investors in Shanghai could barely spit on the sidewalk for the past two years without hitting a highflying stock.

Meanwhile, the U.S. economy is already in recession. At least, that’s what Friday’s jobs report suggests.

“The Bureau of Labor Statistics (BLS) used a full suite of gimmicks on the November jobs report,” says John Williams of Shadowstats.com. “It was not credible and showed indications of heavy manipulation aimed at keeping jobs growth positive but still weak enough to pressure the FOMC toward an easing.

“Even so, the BLS reported seasonally adjusted November payrolls up by 94,000, following October’s revised 170,000 gain. Unadjusted year-to-year payroll growth fell in November, to 1.04%. The decline in November annual growth, to 1.0%, has historic parallels seen only during recessions.”

The Swiss megabank UBS has joined the billion-dollar write-down club this morning… in dramatic fashion. They announced a $10 billion fourth-quarter write-down today, the biggest to date for any non-U.S. bank.

Following the 2007 bailout trend, UBS simultaneously announced that they would be receiving a massive cash injection from a sovereign wealth fund (SWF). UBS will sell the Singapore Investment Corp $11.5 billion in bonds that will one day convert into UBS shares.

Also, UBS reneged their profitable forecast for this quarter. The bank now expects to post its first quarterly loss since 1997. (For more on hyperactive SWFs and how they could help save your own retirement, click here.)

Iran has officially stopped accepting dollars for oil. We’ve heard plenty of anti-greenback banter from Iran this year. From unpegging its currency to the dollar to numerous attempts to convert OPEC’s reserves out of the dollar, it was only a matter of time …

“At the moment, selling oil in dollars has been completely halted,” Gholam Hossein Nozari, Iran’s oil minister, said Saturday, “in line with the policy of selling crude in nondollar currencies… The dollar is an unreliable currency, considering its devaluation and the oil exporters’ losses.”

The dollar, gold and oil all traded a bit nervously over the weekend, ahead of Tuesday’s FOMC meeting. Gold and oil prices rose ever so slightly, to about $806 and $89, respectively. The dollar, as you might expect, slid against its rivals as currency traders began to factor in tomorrow’s near certain rate cut. The dollar currently trades at $1.47 euro, 111 yen and $2.04 pound.

Blackstone, the king of U.S. private equity, is rumored to be partnering with an unnamed Chinese sovereign wealth fund to make a bid for Rio Tinto, one of the world’s largest mining companies.

Hmmmmn… this is like the investment year wrapped up in a nice little package: an American private equity group teaming up with a Chinese SWF to make a bid for one of the biggest players in the great global resource grab of 2007. This, too, might be worthy of a movie.

True to form, if the deal goes through, Blackstone has also announced intentions to break up Rio, including their recent gigantic acquisition of Alcan.

Goldman Sachs has garnered a $2 billion war chest of their own to be used for property investments in Asia. Goldman’s real estate managers already own over 100 golf courses and several high-ticket hotels in Japan. Now they’re turning to the rest of Asia, specifically China and India. “If invested,” comments the Financial Times this morning, “the $2 billion would — by some measures — triple the bank’s equity committed to Asia.”

“Land is and always will be the most valuable asset in places like Hong Kong, Shanghai,
Tokyo, Taipei and Singapore,” comments our Chris Hancock, having spent considerable time there studying the real estate markets.

“These Asian cities lack the land for the urban sprawl we in the U.S. see in places like Chicago, Washington, Houston, Los Angeles, Charlotte, N.C., and Atlanta. So when you can’t build out, you build up. And that’s exactly how these Asian economies are making their magnificent growth possible.”

Chris has three Asian real estate plays in the Free Market Investor portfolio… two of which are still trading below his buy-up-to price. Reserve members get them free.

“Real estate of the non-U.S. variety has charted its own flight path,” adds the venerable Chris Mayer. “While the U.S. and European markets have come down a lot, Asia keeps rising.”

And if you’re looking for more proof that the U.S. economy is decoupling from global markets, check this out:

Historically, the universe of publicly traded real estate stocks has been in the U.S. Not so anymore. “Today,” says Mr. Mayer, “you can see that the non-U.S. markets are more than twice as large as the U.S. market. With the money on tap for emerging-market real estate investment, I’d expect that difference to grow ever wider over time.”

You may recall that upon his return from India in early November, Chris was eager to invest in the Indian hotel industry. But he’s waiting for the market to correct, as it inevitably will. We’ll keep you posted… or you can read it in Capital & Crisis.

China’s brand-spanking-new $2.1 billion coal-fired power plant came online earlier this month. The plant, comprised of four 1,000 megawatt generating units, is now China’s largest coal-fueled power source.

“By the end of 2007,” reports our Byron King. “China will have added NEW electrical capacity to its grid, greater than the total output of Germany. That’s in one year. People are burning anything and everything they can lay their hands on over there to generate heat and power.”

“As a real estate appraiser in the Chicagoland area,” writes a reader, “I worked for banks for 30 years. When the laws changed to package real estate mortgages and sell them, that was the beginning of the end. No one had any responsibility for any loans being made, because all who were involved didn’t care to whom they were made, just so they were made and their fees collected. Realtors went along with the flow, but the mortgage brokers were the true inflators and deceivers in the whole process. They put pressure on the appraiser to make sure their loans were justified, or no more work for the appraiser. Even with good appraisals, the market was frothing. You had multiple contracts on houses that weren’t worth what the bids were.

“It was the low rates and the promise that the real estate would appreciate. Commercial real estate was selling for 4-5% returns without all the expenses accounted for. Now those less-than-5% returns are much less with rising taxes, expenses and vacancies. All those many owners are stuck with them, and they can’t sell for what they were bought for. And now we’re brought to today, with many owners overextended.”

“I just got the latest encouragement from Countrywide to buy a new home. Forty-year mortgages!” exclaims a reader, inadvertently reinforcing the above reader’s remarks.

“I may never live to see my house paid off. How great is that, to die owing? Needless to say, it went straight to the shredder. I bought my house to live in, not to make gobs of money, sell it and buy a now more expensive house, exactly like the one I live in now. Let the prices fall — my tax rates will fall, as well.”

The 5 responds:
Prices will continue to fall. Your taxes? Not so quickly.

“Are you out to lunch or what?” asks a reader. “Assistance to borrowers in danger of losing their homes, regardless of whether they made, or were duped into making, poor purchase decisions was not only the caring and appropriate thing to do, but was also necessary to restore confidence. The markets showed their approval. To ignore the plight of hundreds of thousands of Americans is to confirm the view of many that big business cares nothing for the proverbial ‘little guy.’”

The 5 responds:
You’ve gotta be kidding me. What does this have to do with big business versus the little guy?

This market rose on a sluiceway of easy credit, government-sponsored mortgage lending and mortgage brokers falling all over themselves to get a piece of the action. When we interviewed Robert Rubin for the movie IOUSA,
he trotted out this old chestnut: “There’s no such thing as a free lunch.” If this very limited and entirely voluntary bailout actually comes to fruition, someone will have to pay the cost. That someone is likely to be you… you’ll pay higher taxes, higher mortgage rates/fees, or both.

Cheers,

Addison Wiggin
The 5 Min. Forecast

P.S. Even with the White House’s “lipstick on a pig” bailout plan, the fallout out from rising foreclosures is likely to take its toll on financials throughout 2008. We’ve been beta testing a new service for just such an occurrence. Since August of this year, you’ve been receiving the Strategic Short Alert free of charge.

Three of the four positions editor Dan Amoss has picked are up… the biggest gain to date is 58%, down slightly from its apogee of 80%. The average of all four positions is up 12%… three times what the Dow returned during that same period. Next year, we’re expecting gads more.

For details on continuing to get the Strategic Short Alert free, see our membership drive for the Agora Financial Reserve.

ADDITIONAL RESOURCES
Blackstone plans audacious bid for Rio Tinto
Goldman in $2bn Asia real estate push
The coming China crash

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

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

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

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

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

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

It was soon completely forgotten.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Best regards,

Addison Wiggin
The 5 Min. Forecast

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

• Top S&P 500 performers derive their revenues outside the U.S.: why you should care
• Big surprise: Bush promises to use your money to bail out subprime lenders…
• Bureaucrats, wonks and lobbyists make Maryland the No. 1 wealthiest state in the union
• Buying opportunity in the euro… Russian news sends wheat skyhigh… prices prompt pasta protests in Italy
• China’s “total economic warfare” reprise…Amoss on Dubai’s future within its unstable surroundings
• Overtime: We bid Dr. Richebacher adieu… he will be missed.

Markets were closed yesterday for the holiday.

So… we begin today with an observation. The S&P 500 companies with international exposure have performed drastically better over the past few years than those with strictly domestic operations.

The recently created Bespoke International Revenues Index tracks all S&P 500 companies that generate more than half of their revenues from outside of the U.S.:

Investing in internationally savvy S&P companies since 2005 would have nearly doubled your profits compared to buying the whole index. For companies uniquely suited to cash in this trend, don’t miss Christopher Hancock’s Free Market Investor.

As we cautioned Friday morning, President Bush unveiled a massive bailout plan for subprime borrowers before the three-day weekend.

Bush promised to increase aid offered by the Federal Housing Authority (FHA) to “troubled” borrowers, remove tax liabilities for subprime borrowers about to lose their homes and to increase federal regulation of “predatory” lenders.

Speculators, says Bush, will not be bailed out. We’re not sure Mr. Bush can tell the difference between “speculators” and “troubled” lenders, except perhaps by checking if he can find their names on the White House speed dial directory. And… don’t you love the phrase “predatory lenders”? It’s a nice catchall for all the bad people who get lynched on the downside of the credit cycle… but were formerly heroes on the upside for helping so many people in need.

“By promising to absorb the $100 billion in subprime real estate losses,” says Adrian Ash in this morning’s Rude Awakening, with an alternate explanation of the administration’s motives, “Bush is in effect doing what many small-town U.S. banks did during the early stages of the ’30s Depression: Putting all the money where passersby will see it, right there in the front window, just to prove that the money exists.

“That way, or so the logic runs, anxious depositors will see their money’s still there…and they’ll wait a while longer before forming a queue to empty the bank in a panic.” You can check out full coverage of GW’s subprime plan in this morning’s Rude Awakening.

The euro retreated versus the dollar over our long weekend. The Esperanto currency is now barely clinging on to the $1.36 price.

“A lot of traders are beginning to see the light regarding Thursday’s ECB meeting,” says Chuck Butler of EverBank, “and realizing that there will be no rate hike at this time, and thus pulling out of euros and taking profits. I suspect we could really see this become the trade of the week, or even month, before the euro turns around and heads to 1.45.”

The ECB has been hinting at rate hikes all summer, most specifically at its next meeting, this Thursday. But times have changed… the ECB has injected billions of euros into the banking system since its last meeting, and a rate hike seems less likely by the day.

If you’re long the euro, Chuck says this week could be a great time to buy.

“Despite record spending on new oil and gas projects last year,” reports Chris Mayer, “companies found little new oil and gas reserves.” A new joint study by two industry research firms found that industry spending increased 45%. Yet that spending generated only a 2% increase in reserves.

“This reflects the high costs of production at maturing fields with declining output,” says Chris. “It also reflects difficulty in finding new reserves. This report comes on the heels of an earlier study by the International Energy Agency. The IEA pointed out that supply was falling faster than output expected in older fields, especially in the North Sea and the Gulf of Mexico.”

Are you ready? On Sept. 13, the world’s top pasta-consuming nation will put down their forks and Parmesan cheese and stage a “spaghetti strike” by refusing to eat pasta for 24 hours. Pasta in Italy has risen as much as 25% this year due to historic high wheat prices.

By sheer coincidence, Kevin Kerr will be in Milan that day speaking at a commodities investing conference. Hopefully, spaghetti withdrawal won’t prompt a marauding, angry uprising against our visiting commodity trader. We’ll keep you updated… at the very least, some entertaining pictures should come about.

Among other things, Kevin will be commenting in Milan on the fact that Russia — the world’s fifth largest wheat exporter — is considering banning the sale of wheat to foreign nations. Moscow officials are concerned about wheat’s skyrocketing price and its effect on the Russian consumer… especially on the eve of national elections.

“The announcement that the Kremlin is considering a ban on exports is absolutely one of the most bullish pieces of news we’ve heard for wheat in a while,” Kevin wrote to us. Wheat is currently priced at $8.06 per bushel. “Given this news, $9 a bushel is a real possibility,” says Kevin. “Export inspections are running very high and demand is huge.” This is a busy season for the Maniac Trader. You can follow his exploits in Resource Trader Alert.

Results from a Census Bureau study in the U.S. show that Maryland is the “wealthiest” state in the country. Hmmn…

The average household in the state where the Agora Financial headquarters are located earns an average $65,144 a year — more than any other state in the union. Runners-up include New Jersey, Connecticut and Hawaii. Of the “poorest” states, Mississippi, West Virginia and Arkansas hollow out the bottom three.

The average Mississippi household earns only $34,473 a year… almost 50% less than Maryland homes. We suppose we have the federal government — and your tax dollars — to thank for this largesse. Merci.

For the second time in three weeks, Chinese operatives have been accused of hacking into foreign government databases.

The Financial Times reported yesterday that the People’s Liberation Army hacked into Defense Secretary Robert Gates’ computer in June, which prompted American IT spooks to take down their network for a week.

Coupled with last week’s revelation that PLA computer nerds hacked into German Chancellery systems, we surmise China is on the information offensive. A couple of years ago, we published a report detailing China’s penchant for what it calls “total warfare.” Facets of that strategy include economic and IT strategies that require very long-range strategic vision. These news reports have prompted us to dig into the archives and recall our forecasts at the time. We’ll keep you posted on what we dig up….

“One part of the mortgage fallout has not been discovered on this side of the Atlantic,” notes a reader. “The Saechsische Landesbank (the Bank of Saxony) in the former East Germany invested about 1 billion euros in the America mortgage boom, hoping to profit from the (hopefully) rising interest rates. It didn’t count on the mess we’re in now.

“Result: They just folded, lock, stock and barrel! And last weekend, the Baden-Wuerttembergische Landesbank (the Bank of Baden-Wuerttemberg), with Stuttgart being the capital of the state, bought them out, since the BWL is a very rich institution. But being a andesbank (State Bank), they are owned by no other than — you guessed it — the taxpayers!!

“Who would have thought that German taxpayers would have to start bailing out greedy mortgage crooks on this side of the Atlantic?

“To keep things rather quiet, and sweep it under the rug, the BLW only made a rather short press release without elaborating on what really happened or why the SLB really failed! If the taxpayers find out what’s going on, there’ll be major uprising by the German population. But being sneaky as these financial crooks are, I doubt anything tragic will ever happen. Boy, oh boy!”

“I have seen no comments about the possible impact on fast-growing Dubai of any ruckus in Iran,” wrote another reader last week.

After The 5 responded in our flippant, superficial way, Dan Amoss of Strategic Investment added these two cents: “Dubai is likely to continue on a path of economic progress as long as it maintains very pro-free market policies – the kind that attract companies looking for a place to invest without high tax and regulatory burdens. But this is a slow-moving, generational trend; I doubt that Dubai’s economic progress can proceed without a few major speed bumps, including the possibility that Iran’s crazy leaders do something rash.

“Not only does Iran represent a constant threat to other Middle Eastern countries,” Mr. Amoss continues, “but they also need to distract the attention of their population away from a steadily deteriorating economy — one that will continue to suffocate under socialist-inspired policies (like rationing and price controls). Ahmadinejad was elected largely for his promise to ‘fix’ the economy, and that promise is clearly not working out.

“Lots of Western IT and financial companies have exposure to Dubai, but as far as I know, none of them has a critical level of exposure. In my view, the ones most at risk if the region were to descend into chaos would the Saudi/Kuwaiti/etc. oil billionaires who own assets like hotels.”

Regards,

Addison Wiggin
The 5 Min. Forecast

P.S. A few hours ago, we sent you the final reminder. You can still lock in six months of the world’s most valuable undiscovered stock research… free. But you must respond by Midnight tonight . Cheers.

P.P.S. In late July 2005, right before the start of our Vancouver conference that year, we released a book called The Demise of the Dollar. The day we released the book, it displaced the Harry Potter book then selling on the No. 1 spot on Amazon’s best-seller list and stayed there for the balance of our conference. It made for an interesting walk through the exhibit hall and bookstore.

Well, we’ve done it again. This morning when we began checking our e-mail, we saw that Bill Bonner’s book Mobs, Messiahs and Markets displaced Harry Potter and the Deathly Hallows, the seventh in the Potter series, at No. 1 for the better part of the Labor Day holiday. It’s currently sitting at No. 3 on Amazon’s best-seller list.

But here’s an interesting twist. When you buy a book on Amazon, it gets paired with another book that the publishers think you will like. “If you buy X,” the site says, “you can get Y for an x% discount.” If you’ve purchased any books on Amazon, you know what we’re talking about.

Here is an excerpt from a letter we sent to readers of the Richebacher Letter and the press:

Dr. Kurt Richebacher, famous financial commentator and forecaster of the subprime mortgage fiasco, died last week of natural causes. A iconic contrarian within the economic community and author of The Richebacher Letter, Richebacher was once described by former Federal Reserve Board Member John Exter as “one of the best economic analysts in the world.”

Dr. Richebacher most famous prediction occurred in his latter years, when in 2001 he forecasted the current mortgage meltdown with stunning accuracy. “The new housing boom is another rapidly inflating asset bubble financed by the same loose money practices that fueled the stock market bubble,” wrote Richebacher in September of 2001. He continued to chastise lenders and market makers for allowing the bubble to swell until he fell ill in early 2007, only months before the subprime meltdown began in earnest.

Dr. Richebacher’s legend was far greater than his successful prediction of the latest market downturn. His consistently contrarian viewpoints were rarely easy to digest, but always poignant, accurate, and of the highest economic caliber.

He became so well known for forecasting financial calamity, that Former Federal Reserve Chairman Paul Volker once said, “I think it’s the job of each Fed chairman to try to prove Richebacher wrong.”

Before falling ill, Dr. Richebacher was close to completing what he thought to be his life’s finest work – a successful refutation of the monetarist’s view of the great depression. Richebacher was vigorously writing his last book in an effort to support this thesis near the time of his death. His publisher, Agora Financial, is currently seeking the means and research to conclude and publish his final work.

Never afraid to offer a frank assessment, Dr. Richebacher left this world with one final prediction: “The housing bubble – together with the bond and stock bubbles,” he wrote in the final edition of The Richerbacher Letter, “will invariably implode in the foreseeable future, plunging the U.S. economy into a protracted, deep recession.”

Dr. Richebacher passed away after 88 years in this world. He was a strong, temperate soul… an old-world gentleman – literate, well-traveled, intelligent and critical. And despite all the difficulties he’d seen in his lifetime – war, depression, illness and many long years after his wife passed away – he still enjoyed a good wine, a fine meal and a challenging conversation. He will be missed.