• 75% of all Americans claim the U.S. is in recession… the real driver behind our gloomy outlook
• Better-than-expected I-bank earnings shock Wall Street
• Chris Mayer’s market outlook, and how he plans to survive coming volatility
• Afraid to buy stocks? You’re not alone… proof of record cash positions on the Street
• Commodities stage steep pullback… Kevin Kerr on how to trade the correction

More than three out of four Americans believe the country is in recession, says USA Today this morning. That’s the worst reading of this particular Gallup Poll since September 1992.

One big driver of the gloom is the destruction of the housing market. New construction on single-family homes fell 6.7% in February, to the slowest rate in 17 years. According to the Commerce Department, housing starts have slowed to an annual rate of 707,000… a level last seen in 1991.

Since the peak two years ago, new home starts are down 62%.

Building permits, the best indicator of future housing starts data, also plunged in February. Permits fell 7.8% in the month to an annual rate of 978,000, also a 17-year low and the steepest monthly decline since 1995.

Goldman Sachs and Lehman Brothers both shocked Wall Street this morning with much-better-than-expected first-quarter earnings. Goldman said it earned $3.23 a share in the first quarter, beating estimates by about 25%. Lehman did the same, reporting earnings about 13% higher than the Street expected.

The news from Lehman was particularly well received. The market was anxiously awaiting Lehman to suffer a fate similar to its infamous counterpart Bear Stearns. Traders had barraged Lehman shares over the past week, sending LEH from $48 to $21 in the last five days.

But on the news this morning, shares in LEH have rebounded nearly 70% from Monday lows, to $36.

Still, both banks show over a 50% year-over-year net decline in first-quarter earnings — a long, long way away from the profitability they enjoyed just a year ago.

Nevertheless, markets skyrocketed this morning on the Lehman and Goldman news. The Dow surged over 200 points on the open.

The opening rally this morning furthers some good will mustered by investors midday yesterday. When the Dow, S&P and Nasdaq all opened the week with 1.5%+ losses… and given the Bear news … we were ready to let the crash flags fly. But traders, like consumers, held their ground. The Dow actually mustered a gain of 0.2% by the day’s end.

“It’s big mess,” our Chris Mayer told CNBC yesterday, referring to the Bear debacle, “and it’s going to take time to sort out. In the meantime, it’s going to weigh on the market. We’re likely to see some screwy prices as hedge funds and other leveraged players face forced liquidations. The fall in prices itself will also shake loose additional sellers as fear starts to take hold.

“That creates opportunity for investors who take a cooler view of things. Just as that huge gap opened up on Bear, there are other gaps that open up on the upside. In other words, there are stocks that dealmakers would pay considerably more to own getting tossed overboard in a panicky market.

“Studies show that after compounding, 90% of the return on stocks is generated on just 1.5% of the days the exchanges are open. So things can snap back quickly. I think if you’re going to put money in this market now, you’ve got to be patient and willing to give ideas some time.”

Chris’ book Invest Like a Dealmaker shows exactly how the richest investors in the world keep calm in times like this — and dive in for incredible bargains when the time is right. It’s worth the read.

Prices at the wholesale level jumped 0.3% in February. “Core inflation,” stripped of food and energy costs, and regarded by the Fed as the accurate measure of rising prices, actually shot up 0.5% — its biggest monthly leap in over a year.

Over the past 12 months, PPI is up 6.4%, with energy goods (up 19%) and food (up 6%) leading the way.

Yet as the Fed meets today, fed funds futures in Chicago are pricing in a near 100% chance of a 75-point cut today, about a 50% shot at a full 100-point slash.

Anything less than 75 points and you can expect mayhem on the corner of Wall and Broad streets in Lower Manhattan.

“The Fed has been playing the equivalent of Whac-A-Mole,” said Former Fed Vice Chairman Alan Blinder yesterday, “as financial turmoil keeps cropping up in new and unexpected places. Yet many of the problems facing [the economy] are beyond its reach.”

“When you have Fed insiders describing what they do as an arcade game,” suggests Christopher Hancock, “in which players try to hammer down plastic critters that randomly pop out of holes, you’ve got to wonder where’s the safest place to put your money.”

The yield on a three-month U.S. Treasury bill fell to a 50-year low yesterday. The 13-week T-bill, widely considered the ultimate in “safe” investments, yielded a pathetic 0.6% yesterday.

In other words, more investors are sitting on the sidelines than have been since Elvis was gyrating in front of his ladies.

The dollar backed off yesterday’s all-time low… but only by a smidge. The dollar index, after striking a new all-time low of 70.6, returned to 71.2 this morning. Light volume suggests traders are holding their breath until Bernanke exhales his own today.

“These aggressive moves by the Fed have all but sealed the fate of the U.S. dollar,” says our friend at EverBank, Chris Gaffney. “Currency traders have continued their assault on the greenback, and there is currently no rescue in sight. I don’t think even Hank Paulson can seriously talk about a strong dollar policy anymore.

“They have, obviously, thrown inflation concerns and concerns about the weakening currency out the window and are just trying to keep the U.S. economy from falling off the precipice. I think we have, unfortunately, already fallen off, and the currency traders look like they agree.”

“I myself watch very closely the development in the world economy and the U.S. economy,”
said Chinese Premier Wen Jiabao today, “and I’m deeply worried.”

Wen at the NYSE… quite literally keeping an eye on the U.S. economy

“What concerns me now is that the U.S. dollar is depreciating continuously, when the U.S. dollar will reach the bottom in this depreciation process, what kind of monetary policy the U.S. government will adopt and where the U.S. economy is heading.”

“China’s economy is already tied to the globalized economy,” said Wen. “All kinds of changes and fluctuations in the international economy will inevitably be reflected on China’s own economy.”

Oil finally took a breather yesterday. After touching another record high of $111, light sweet crude fell a good 4%, its worst one-day performance since August.

Thus, oil opened in aftermarket trading at $105 and is trending up to $105. A 75-point cut by the Fed today should kick the dollar in the groin and drive oil back up toward record highs overnight.

Despite oil’s pullback, U.S. gasoline prices attained another record high yesterday. The national average price at the pump has jumped about 1 cent a day for the past week and now rests at a record $3.28.

The U.S. Energy Department forecasts a national average of $3.48 by the end of spring. Bummer.

Gold sold all the way back to $996 last night. In fact, Just about every commodity under the sun got hammered yesterday. The Reuters Jefferies CRB Index — a measure of 19 different commodities including metals, oil, grains and meats — fell 5%. That’s the worst daily percentage loss in about 40 years.

A slowing economy in the U.S. could be putting a damper on demand for commodities. At the same time, financial institutions may be trying to liquidate positions in order to raise capital to shore up their balance sheets. Either would cause a correction in the index.

Either way, it was well overdue. The CRB has had quite a run:

“Am I worried?” Kevin Kerr asks himself. “No, not at all. I knew a correction would come. I’m still very happy we purchased some long-term options.

“Under no circumstances should you panic or start fretting over this kind of correction. That would be a huge mistake. Sure, it’s no fun to see an option lose value, but if you begin to think of it as an actual loss, you are going to have a very tough time trading options.

“As an active investor, the best thing to do now is what we have been doing. Take profits when we can keep the portfolio light and nimble, add when we see good opportunity and never trade beyond our means.”

Visa still plans on floating its initial public offering tomorrow. All signs leading up to this event suggest Visa’s IPO will be the largest in U.S. history, perhaps the world. Still, it ought to be interesting. The world’s largest credit card company floating during the height of one of the worst credit crunches in U.S. history. You can’t buy drama like that…

We’ll keep an eye on it. More tomorrow.

“You let ‘California Homeowner’ off too easy in Monday’s 5,” opines a reader. “For one thing, people who can’t pay mortgages can’t stay in their houses, and the bulk of jobs created in California over the past 10 years have been in home marketing and construction, so you can figure on a bunch of foreclosures from that crowd. Add to that the number of second homes and speculator-owned homes and you have a lot fewer than ‘99%’ of owners happy to stay put.

“Obviously, ‘California’ is whistling past the graveyard, because if he’s owned his home for 25 years and had its value drop below what he owes on it more than once, it means he’s been sucking out his equity for 25 years.

“I’ve owned a house in California for 25 years, and it’s paid for.”

Cheers,

Addison Wiggin,
The 5 Min. Forecast

P.S. Despite gold’s pullback last night, there are still very good reasons why its bull run still has good legs… we explore nine of those reasons here.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Regards,

Addison Wiggin
The 5 Min. Forecast

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

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

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

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

• Goldman puts market in a tailspin… but reveals a massive loss of its own
• Freddie Mac joins the billion-dollar write-down gang
• Housing permits, housing starts, builder confidence data revealed… and it ain’t pretty
• Mike Muehleck on why 1.6 million citizens are planning on leaving the U.S.
• Visiting the Taj Mahal? Don’t bring your greenbacks… they’re no longer welcome
• Plus… Byron King on the Peak Oil “conspiracy”

As if it needed it, Goldman Sachs smeared the financial sector yesterday by downgrading Citi and just about every bank on the block. The Dow, Nasdaq and S&P 500 all responded by losing about 2%. The Dow now flirts with 13,000… a level not seen since the worst of this summer’s credit crisis.

Goldman reported its own prize quant fund, Global Alpha, may lose up to $6 billion this year, too — a 60% loss. The fund returned over 40% gains in 2005.

Freddie Mac joined the write-down gang this morning… in a big way. The government-backed mortgage firm announced an $8.1 billion write-down for the fourth quarter. Freddie Mac officials reported a net loss of $2 billion so far this quarter, and suggested that they may have to cut their stock’s dividend by as much as 50%.

Shares are down nearly 8% as we write.

Housing permits fell to a 14-year low in October, the U.S. Commerce Department reported this morning. Permits to build new homes sunk to an annual pace of 1.18 million in October, down from 1.26 million in September — the lowest seasonally adjusted level since July 1993.

Curiously, the same report revealed that housing starts rose by 3% in October, the biggest hike in eight months. But before you break out the party hats… nearly all growth of home starts in October came from the apartment sector, up 44%.

Construction of single-family homes fell for the seventh consecutive month, declining 7.3%.

And as you might expect, homebuilder confidence is at an all-time low. The National Association of Home Builders updated its builder confidence report yesterday. Builders ranked their confidence with a score of 19 — the lowest ranking in the index’s 22-year history.

A score of 50 marks neutral builder sentiment… any score lower indicates worsening confidence.

Write-downs… real estate… and the dollar. These 5 Min. Forecasts are striking a familiar pose as we head into the Thanksgiving holiday. The dollar got ambushed in the Asian markets overnight. The euro has pushed up close to 1.48. The pound is back into the $2.06 range, and the yen backed off its recent rally, to 110.

The national average for gas prices has risen 18 cents in the past two weeks. Now at $3.09, it’s a dime short of the all-time high set in May. The city with the highest average price? San Francisco… where a gallon of gas will set you back $3.48 this week.

Rising fuel prices are giving people rashes at all levels of “society.” Californian cruise lines Windstar Cruises and Majestic America Line announced this week that they will be adding a $8.50 surcharge on all passengers “cruisin’” after Dec. 15.

“We regret having to take this action and hope our guests understand the impact that fuel prices are having in today’s economic environment,” said Diane Moore, executive vice president of both cruise lines. Somehow, we don’t think this will slow the conga lines one iota… at least for now.

Here’s an interesting trend: 1.5 million U.S. households are preparing to move out of the U.S. A poll by Zogby Intl. of 115,000 Americans estimated that:

1.6 million U.S. households have already made the decision to leave
1.8 million are seriously considering and likely to leave
7.7 million are somewhat serious about leaving and may do so
3.0 million are seriously considering purchase of non-U.S. property
10.0 million are somewhat serious about purchase of non-U.S. property.

“We are not talking about the next major deployment of National Guard units to the Middle East,” comments Mike Muehleck in Strategic Investment.
“In fact, none of the emigrants are government workers or corporate employees leaving for temporary overseas assignments. This is a group of malcontents and adventurers. They consist entirely of private citizens and their families packing up and leaving the USA at their own initiative.

“Why do people leave home for strange foreign lands? While a handful might claim to leave for political or religious reasons, most seek greater economic opportunity. All of my grandparents emigrated from Germany or Lithuania in the early 1900s. My wife’s Chinese grandparents emigrated from China to Siam in the same generation. None came because of a burning desire to be ‘free.’ They all came because they wanted to make more money and thus enjoy a better life.”

Which, evidently, is getting harder to do in the U.S. Mike himself emigrated to Thailand years ago. You can find Mr. Muehleck’s comments in Strategic Investment.

The Taj Mahal, along with 120 other Indian tourist sites, will no longer accept dollars to pay for admission. The Archaeological Survey of India announced this week that a fixed rupee rate will be the only method of admission to the Taj and other sites.

The greenback has lost over 12% of its value to the rupee year to date.

The world’s most famous mausoleum… now also a milestone of the dollar’s demise

“Interesting, this news, on several levels,” reports Chris Mayer, fresh from his Indian investment excursion. “For one thing, it’s another marker along the road of Indian ascendancy. Its own currency, the rupee, long a redheaded stepchild among currencies, is now preferred over the good old American dollar. For another thing, it just shows once again how the dollar is really deep in the soup this time around. This is no normal dollar sell-off, of the kind we’ve seen countless times over the years. This is something big. Something history making. The dollar’s reign is really in jeopardy.

“While I was India, you could pay for many things with dollars. I wonder how this new announcement will change things on the street. Good thing I’m back home. U.S. visitors to India can expect to pay 30% more to visit Indian historical sites. I’m sure other places will follow suit.”

Merrill Lynch launched its largest ever investment plan into Indian real estate this morning. The famous investment bank bought a 49% stake in a portfolio of residential projects managed by DLF, worth about $377 million.

Merrill’s share involves seven midincome residential projects in Chennai, Bangalore, Kochi and Indore, reports the Financial Times. Merrill’s total investment in Indian real estate now exceeds $550 million.

Brazilian defense officials announced plans to build their first nuclear submarine last week. Is Brazil preparing for war? Worried about foreign nations patrolling their waters? No… just looking after their oil…

“When you have a large natural source of wealth discovered in the Atlantic, it’s obvious you need the means to protect it,” said defense minister Nelson Jobim last week. Brazil, which has been discussing nuclear submarine production for decades, is finally moving forward, thanks to the gigantic Tupi oil discovery it reported earlier this month. The Tupi field is believed to contain up to 8 billion barrels of oil.

Brazil has no official enemies in South America, nor has it been the target of any significant terrorist threat. However, the Tupi field could boost Brazilian reserves by as much as 62%… Brazil doesn’t seem interested in taking any chances.

MTV Arabia launched over the weekend. Headquartered in Dubai, MTV Arabia will feature 60% international music and 40% Arabic music. MTV spokespeople said the network will focus on hip-hop and R&B, popular yet underserved genres in the UAE, but promises to be “culturally sensitive” by censoring much of the profanity and sexuality you expect from American music.

The network was launched by a taped performance by rap star Ludacris… famous for songs like “Move Bitch,” and “Pimpin’ All Over the World.”

“Your characterization of Chavez as a dictator displays either genuine ignorance,” writes a reader, “willful ignorance or is a gesture of ‘playing to the gallery’; whichever the case, your image as a savvy international investor is damaged by such rhetoric.

“Additionally, you call the leaders of 13 countries ‘nutjobs.’ I have two comments. One, I suppose that this kind of talk is par for the course for someone from a rapidly failing empire; and secondly, there is the old saying about people in glass houses — your country’s leader, the semiliterate former alcoholic who is furiously banging the nails into America’s coffin, is probably the leader that most people in the world would call a nutjob.

“I’ve always found it a bit unsettling when Americans completely denigrate any foreign leader who displays a lack of enthusiasm for America’s agenda — but I suppose that the effects of having had the privilege of empire include a lack of respect for ‘inferior’ people, as well as diminished critical faculties.

“I had assumed that someone who poses as an astute investor might have escaped these effects. Apparently, my assumption was in error.”

The 5 responds:
Eh, we didn’t call the leaders of OPEC nutjobs. Just Chavez and Ahmadinejad. And yeah, we’d throw Bush in there, too. They deserve each other. Of course, the last time we said that, we didn’t hear the end of it for weeks. So thanks.

As for your comments on empire… we wrote a book on the subject, so you’re not exactly shocking us with insight. That you assume we share enthusiasm for “America’s agenda” — whatever fascist vision you may have of the current administration — is equally as ‘unsettling.’ Or perhaps you just haven’t been reading very long…

“There is much more talk about Peak Oil these days as we have approached $100 per barrel, especially from your leading expert, Byron King,” writes a reader. “But I wanted to ask your thoughts on the whole self-renewing oil field theory. There is growing opinion by scientists that the amount of oil we have on Earth is not fixed, but continually renews from within the Earth itself. There have been many cases in which depleted oil fields have essentially refilled and begun producing again.

“Is the Peak Oil theory a conspiracy set in place to keep us paying large sums of money to tyrants for our oil?”

The 5 responds:
We passed this note to our resident geologist and oilman, Byron King. According to Byron, “Our reader is raising a point concerning what is called the ‘abiotic’ theory of hydrocarbon origination. And yes, there is a small kernel of validity to the idea that hydrocarbons are present deep within the mantle of the earth. For example, there are methane seeps coming from some areas of the midocean ridges and from deep hard rock mines in some parts of the world.

“Some of these small quantities of hydrocarbon may even date back to the formation of the planet, 4.5 billion years ago. But no, these methane seeps are not and — for reasons of basic physical chemistry — cannot be the ultimate source of the oil deposits of the world. Virtually all of the oil and gas deposits of the world can be linked directly to ‘organic’ origins. This means that ancient life forms died and have been preserved and contained within the rock column.

“So the bottom line is that Peak Oil Theory is not some sort of rip-off conspiracy. It is a very real phenomenon that you ignore at your peril.” You can read more from Byron on “abiotic” oil in Whiskey & Gunpowder.

You can also learn the names and tickers of five companies that are prepared to capitalize on the alternative energy source with the most progressive chance of helping wean the U.S. off its dependence on foreign oil here. This report will be published at 5 p.m. tonight, so don’t wait:

Secret California Energy Site — 5 p.m. tonight.

Cheers,

Addison Wiggin
The 5 Min. Forecast

P.S. You’ve got just a few hours left to get four free months of Byron’s Energy & Scarcity Investor. We allotted 2,500 spaces for the inaugural wave of ESI subscribers, and as of this writing, less than 800 remain. After tonight, what few spots are left will be sold at full price. Click here to learn more about your last chance to get ESI free for four months.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Regards,

Addison Wiggin
The 5 Min. Forecast

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

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