by Addison Wiggin & Ian Mathias

• Tax Day special… how early revenue numbers imply serious state and federal troubles
• A stock sector you’re probably not thinking about… but should
• Patrick Cox on how to shield yourself from federal overspending
• Alan Knuckman shares a leading indicator for economic recovery
• Plus, gold questions pepper the 5’s inbox… our responses, below

  Tax Day! One of our favorites of the year….

As could be expected -- and just when Uncle Sam and his friends need it the most -- total tax revenue among American states will be down this year by the largest percentage since the Great Depression.

  State tax revenue fell 4% in the last quarter of 2008, the first decline in six years and the largest in over 50. Preliminary numbers suggest the first quarter of 2009 will be even worse… by a multiple of three. Average state tax collections in January and February were down 12.8% compared to the same time in 2008.

Personal and cooperate income are in the crapper. Property taxes are too. Taxes on investment profits? Heh, right. And with all the economic strife over the past year, we can only begin to imagine what tax evasion strategies, subversive returns and delayed filings must be sticking in the IRS’ craw on this fine day.

  But fear not for the economy… the Fed chairman is on the case. “We have seen tentative signs that the sharp decline in economic activity may be slowing,” Ben Bernanke suggested yesterday.

In a speech at Morehouse College in Atlanta, we heard more of the same: “A leveling out of economic activity is the first step toward recovery,” and that’s not sustainable "without a stabilization of our financial system and credit markets,” Blah, blah, blah.

Mr. Bernanke repeated this oft-heard refrain, too:

The Fed “treats its obligation to ensure price stability extremely seriously… I can assure you that monetary policymakers are fully committed to acting as needed to withdraw on a timely basis the extraordinary support now being provided to the economy, and we are confident in our ability to do so.”

  On cue, consumer prices enjoyed their first annual decline since 1955, the Labor Dept. reports today.

The consumer price index (CPI) fell 0.1% in March. Year over year, the “official” rate of inflation is now a negative 0.4%. Looking at these numbers, Mr. Bernanke won’t have to begin retracting monetary infusions anytime soon.

  Curiously, the Federal Reserve announced it is considering having regular press conferences. Apparently, the FOMC announcements, Beige Book releases, 60 Minutes interviews, a full speaking tour and weekly congressional hearings still aren’t satisfying public demand for Bernanke’s bewhiskered visage.

The Fed leaked word today that it’s mulling the idea of post-decision press conferences, not unlike their counterparts at the European Central Bank. We can’t wait.

  “By no means are we out of the woods just yet," said the eternally confident President Obama yesterday, hedging of his own “glimmers of hope” speech over the weekend. “The severity of this recession will cause more job loss, more foreclosures and more pain before it ends."

Obama took a spin over to Georgetown University yesterday and delivered what was effectily a “state of the economy” address. According to the president, the key to recovey is “built upon five pillars.” They are, in the useful order in which he presented them:

1. Reform Wall Street
2. Education investments
3. Renewable energy and tech investments
4. Health care reform
5. Deficit reduction

(What about Somali pirates? Where do they fit in?)

Unfortunately, for this earnest young man, he’s in a race against time…

  “The impact of the radical increase in spending,” writes our technology adviser Patrick Cox, “will be to move the entitlement crisis much, much closer to the present.” It’s a simple idea that Patrick advocates, yet it’s strangely absent in our national dialogue: If we go deeper into debt now, won’t entitlement programs run out of money even sooner?

“The eminent futurist Juan Enriquez of the Harvard Business School ‘gets it,” continues Patrick. “He predicts the date of meltdown as 2017. Fortunately, Dr. Enriquez sees an avenue of escape, as I do. He calls it the ‘reboot,’ but he is really just talking about the transformational technologies we've been telling you about. These technologies, ranging from cellular engineering to robotics, have the potential to save our collective butts and make you rich enough to buy that private island you've had your eye on.

“Prior to the bailout, I was confident that the reboot would come well before entitlements consumed our entire budget, precipitating an intergenerational political crisis. Now, however, it's clear that we're in a race. If transformational technologies are brought to market quickly enough, huge components of our current budget will simply disappear.

“Take, for example, just one biotech example: Alzheimer's disease. Estimates are that AD costs the U.S. at least $100 billion annually. Throw in cures for late-stage renal failure and cancers, along with longer productive life spans, and we'll be in the black again.”

Patrick will be revealing many of these incredible breakthroughs in person in Vancouver this July. We’ve also extended an invitation to Juan Enriquez. If you haven’t made plans to attend the symposium, you should do so now, right here.

For more immediate gratification, please subscribe to Breakthrough Technology Alert.

  Elsewhere in the tech world, eBay announced today it will spin off its crudely named Internet phone service, Skype.

If you’re unfamiliar, Skype is an Internet telephone service that is currently threatening the viability of major telecom players around the world. Essentially, it allows you to make free calls over the Internet, instead of traditional wired or wireless phone networks.

Skype was recently launched as an “app” on the iPhone, and with the growing propagation of Wi-Fi hot spots, the line between computer networks and phone networks is quickly blurring… as is the feasibility of AT&T, Verizon and their kin.

eBay says Skype’s IPO is planned for early 2010. We’ll be keeping an eye on it, for sure. Patrick Cox highlighted Skype a few times in our editorial meetings last week… one of many breakthrough technologies he thinks will revolutionize business as we know it.

  In the markets, American indexes took a break from suckering investors in yesterday. A batch of much-worse-than-expected retail sales data was a sobering splash of cold water in the face of the rabidly optimistic. The major indexes -- and a few minor ones -- ended down 2% or so.

  “Pigs aren't the first thing you think of when investing in the stock market,” writes one of our small-cap analysts, Greg Guenthner, “but maybe in today's economy, they should be.

“One of my favorite new investment ideas provides a service of high demand to the largest group of people on the planet.

“Over the last few years, Chinese pork consumption has nearly tripled. As the amount of disposable income in the Far East mega power has increased, the amount of pork consumed has skyrocketed. While many Westerners were busy buying iPhones, Hummers and extra houses, a majority of Chinese citizens began pampering themselves with an extra serving of hong shao rou, or red-cooked pork -- a popular dish in the People's Republic.

Your Congressman's best friend

“Because of this, many more commodity traders have been jumping into the frozen pork bellies pit. Recently, pork prices jumped 50% in one year. After all, China just became a net importer of pork for the first time in its history. It's only starting to become a large-scale issue. Last year, Chinese imports were up a whopping 311%.

“So how do we make some money on this trade? We can either buy a bunch of hogs and try to sell them over the black market to a Chinese importer…or you can check out two stocks I showed Penny Stock Fortunes readers yesterday. One is a leading pork processing company in China. The other is one of the largest providers of hog feed in the Eastern Hemisphere.” For details on feeding at this trough, please read the following.

The small-cap guys also sold their stake in Dendreon Corp. yesterday, after the company’s “cancer vaccine” passed phase III FDA trials and the stock popped. If you bought and sold when Gunner and crew recommended, you’d have netted 255% gains. Nice work.

  Lousy earnings from Intel and big jobs cuts at Yahoo and UBS are continuing to keep stock market optimists in check today. But the testosterone rush of the recent buy-up is still in the air. As we write, stocks are breaking even.

“Keep an eye on copper prices,” advises our resource man Alan Knuckman. “This reflation of assets has investors looking for the next move. Copper, as an indicator, has risen more than 30%, from under $1.50 to over $2.00 per pound in just a few short weeks. Part of the recovery can be attributed to future infrastructure projects designed to stimulate the economy, but prices are still a significant distance from the $4.00 a pound last July.

“Increased demand for commodity assets should signal an extension of the recovery off the lows so far. The price recovery could be simply a rally back to reasonable supply-and-demand stabilization now that prices have stopped crashing. The next few weeks and months are crucial to assess the turnaround follow-through from these extreme lows.”

Copper is up today, around 3%, to $2.13.

  Other commodities are, umn, not. Gold is hanging at yesterday’s $890 an ounce. Oil, too, is sitting still at $50 a barrel.

  The dollar index got a half point bump this morning after the consumer inflation report printed better than Wall Street anticipated. As we write, the index is up to just above 85. The euro and the pound are trading at $1.32 and $1.49, respectively, today.

  “Advisers to The 5,” a reader writes, “are often gold bugs who spin the situation unrelentingly -- buy gold today! Now, I agree that the longer-term prospects are bright, but someone needs to balance the short-term Pollyanna perspective being touted by your advisers. Sure, gold is up when the time period is picked selectively; for that matter, so is the DJIA when you compare it with 1968. However, once gold hit a little over a $1,000, it is essentially down 20% from its peak and is in a decided downtrend. If fundamentals alone determined the price for gold, it would already be at $2,500 an ounce. Note that they do not, and, sadly, it is not at such pricing levels.

“What we should, in fact, focus on is a technical analysis that shows it has broken down below key support areas (around $900). It is now testing (unsuccessfully) these support areas from the underside. Likely downside targets are closer to $650 per ounce. I suggest better advice is to keep your (gold) powder dry, wait for much lower prices (likely about 25% lower than they are now) and then jump in with both feet.”

The 5: That’s a first. We usually get criticized for not having a gold bug on staff.

We’ve got two technical options traders, a global currency trader, a roving commodities and resource trader, a geologist turned oil buff, a banker turned long and deep value addict, a hedge fund quant turned short side strategist, a policy wonk turned tech junkie, three small-cap specialists who’ll buy anything, a reformed international equities expert, another intrepid globe-trotter with no discernable training, a certifiable macroeconomist, several armchair historians, a few lads and lasses with advanced philosophy degrees, more than our quota of MBAs, artists and tech geeks… but not a single gold bug.

Unless, of course, you count Bill Bonner… but he lives in France.

For the record, we’ve been recommending you make gold a part of your investment strategy in one form or another since 1999, when it was trading at $253 -- an 18-year low. Our recommendation is and has been as an insurance policy for the long term. Yesterday, we merely pointed out that many notable mainstream investors  now share this point of view.

Even so, you’re more than welcome to trade the technicals all you like. If gold drops another 25%, we’ll be buyers again right alongside you.

  “Seems that gold has generated much attention,” another reader writes. “I do have about 20% in the yellow metal. Yet I have a question: If we do see huge inflation over the next two-three years, gold will likely increase, as many have predicted. However, will its buying power increase?

“If not -- it’s simply a hedge and will only buy tomorrow what it buys today, correct? I’ve read that an ounce of gold today will buy a nice suit of clothes, just as it did in the pre-Depression 1900s. Or will it increase with some additional premium so that you realize an increase in the asset’s real value.

“Great newsletter and insight! Thanks!”

The 5: If inflation sets in as aggressively as we believe it will, gold’s “value” will increase relative to paper assets -- the dollar, stocks, bonds, mortgages… toilet paper. But even then, the adage of an ounce of gold for a man’s suit still stands. To play with the value of gold versus physical objects, may we recommend PricedInGold.com, created and updated by our friend Charles Vollum, who joins us in Vancouver each year.

Thanks for reading,

Addison Wiggin
The 5 Min. Forecast

P.S.  It has been raining for two days here in Baltimore. Still, we sent two intrepid observers to check out the Tax Day Tea Parties being held around the area. We’ll let you know how this fair-weather protest turned out.

P.P.S.  Get $9,554 Worth of Wealth Protection…Free for a Year

This invitation is strictly limited. We’d like to offer you a full year’s membership in our brand-new wealth-protection society -- plus $9,554 worth of member benefits -- FREE.

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by Addison Wiggin & Ian Mathias

• New year, new paradigm… one commodity’s emerging trend for 2009
• Chris Mayer follows an interesting trend among worldly central banks
• SEC mulls new short selling rules… Dan Amoss on how it could affect your trading
• Stocks sag for second day… Soros, Parenteau say bear market rally nearing conclusion
• GM is definitely screwed… unveils partnership with Segway, designs scooter for two
• “You’ve made it,” a reader declares… his photographic proof of our success, below

  Crude oil traded down this morning along with stocks… thus, a new trend emerges in 2009:

In 2008, the oil trade was all about the demise of the dollar and the threat of global energy scarcity. Whether that was a legit trade or not (we think it was and will be again soon), you can’t deny crude left stocks in the dust for most of last year.

This year, oil is no longer following the ’08 paradigm. Crude has become a “reflation” trade; anytime the world seems less doomed, up ticks the price of black goo… right alongside the Dow. Expect the trend to continue until further notice.

A barrel of crude goes for $49 today.

  Eurostat this morning announced the European economy contracted 1.6% in the last quarter of 2008 -- its most sluggish effort since 1995, when records began. Major indexes in Europe are headed for a 1% decline for the day.

  Australian and Japanese central banks announced their respective rate policy adjustments this morning. Japan kept is main lending rate at an impressively low 0.1%. If you’ve been wondering if stimulus spending and low, low interest can reflate an economy hellbent on rescuing its banking system… look no further than Nippon.

Australia bumped its rate down to 3%.

  “Many central banks are boosting their gold holdings,” adds Chris Mayer. “The Russians are no fools. They’ve nearly doubled their exposure to gold since the end of 2008. Russia’s gold holdings now make up 4% of its foreign reserves, compared with only 2.2% at the beginning of the year.

“Smaller central banks are also being crafty. Ecuador’s gold holdings have more than doubled since the start of the year -- to 54.7 tons, from only 26.3 tons. Gold now represents 32% of that country’s reserves. Even Venezuela is buying gold. Gold now makes up 36% of its reserves, compared with only 23% in 2009.

“Perhaps central bankers see more clearly than most what the effect of all their money creation will be. In recent months, we’ve seen a truly unprecedented boom in bank reserves. Bank reserves drive money creation.

“More money means money buys less -- and the gold price should rise.”

  Gold’s spot price found support yesterday morning around $865. It’s managed to keep sellers at bay since, and goes for $880 an ounce as we write.

  The U.S. Defense Secretary Robert Gates unveiled a $534 billion annual budget for the Pentagon yesterday. The media is abuzz with all the programs Gates’ cut from the 2010 fiscal year… from experimental Navy warships to a new presidential helicopter to unmanned combat tech.

Call us crazy, but we can’t help but notice the latest budget for the Pentagon is 4% higher than the 2009 allocation. There’s that whole credit crisis going on, you know, worst fiasco since the Great Depression… maybe time to scale back our never-ending mission to police the world? Oh excuse us, “spread democracy.”

“Every defense dollar,” said Gates, “spent to overensure against a remote or diminishing risk — or in effect to run up the score in a capability where the United States is already dominant — is a dollar not available to take care of our people.”

Amen, Mr. Secretary… so what’s with the half-a-trillion-dollar tab?

  The SEC is currently mulling new rules each designed to make short selling harder. Here’s the gist of the three made public:

• The infamous uptick rule… regulators are considering reinstating a rule that requires a stock to be bid up before a short seller can sell the stock down
• Two of the proposed new rules would build what the SEC calls “circuit breakers.” Essentially, short selling could be halted on any stock that falls a certain percentage in a certain amount of time. Or as one proposal suggests, after falling a certain amount, a stock would have to pass a bid test -- meaning someone would have to buy a large portion of shares -- before short sellers could continue their evil “bear raids.”

“The SEC is making progress on efforts that should maintain the reputation of honest short selling,” writes our resident short side analyst, Dan Amoss. “Hopefully, it will dispel the myths and conspiracy theories about short selling -- myths promoted by people like Dick Fuld, former CEO of Lehman Bros. Fuld was busy attacking short sellers while he was overstating the value of the toxic assets on Lehman’s balance sheet by hundreds of billions of dollars. ‘Naked short selling’ and ‘bear raids’ are the most popular excuses for executive incompetence.

“The uptick rule will probably be reinstated, and that’s not necessarily a bad thing for short sellers. The uptick rule will probably increase transaction costs, but most short sellers have never relied on rapid-fire selling as part of their trading strategy; most are patient and wait for their short thesis to play out over months and years.”

Dan’s Strategic Short Report readers had a payday of a lifetime when they shorted Lehman Brothers in 2008. When the dust settled, SSR readers pocketed 462% gains on the play… in just 4 months. Dan’s analysis is as sharp as ever this year, already brining in gains of 344% and 63%  over the past 6 months. If you’d like his advice, definitely check out Strategic Short Report.

  Stock investors took profits yesterday (or was it those damn short sellers!?!). Early yesterday, rock star analyst Mike Mayo issued “sell” ratings that helped take the Dow down almost 150 points. But irrational optimism refused to die and stocks ended the day with small losses… major indexes fell less than 1%.

“Our own sense,” writes Rob Parenteau, “is that we are coming to the end of the ‘less bad is good’ rally in equities and investors will next need to see policy fixes show swift and favorable results. The reality of punk Q1 earnings announcements, plus the feedback effects of an alarming increase in the unemployment rate (which could easily be north of 9% before midyear) on credit defaults and the housing market, are both likely to sink in during the weeks ahead.

“The global economy is in the midst of a deep restructuring, and confusing the end of a free fall phase, with an actual economic recovery likely to prove an expensive mistake for investors chasing the recent equity rally.”

We agree with Rob. And that string of “punk Q1 earnings” he mentioned unofficially begins after the closing bell today, when Alcoa drops its latest numbers. We’ll keep an eye on the numbers from the metals giant -- and the wave of big-cap earnings that will follow over the next few weeks. Stay tuned.

  “It’s a bear market rally,” George Soros told Bloomberg today. Leave it to the odd Hungarian billionaire to state the obvious: “It’s a bear market rally because we have not yet turned the economy around… This isn’t a financial crisis like all the other financial crises that we have experienced in our lifetime.”

So where is Soros -- one of the world’s most successful investors -- putting his billions? “I think Brazil actually,” says the thickly bespectacled one, “together with China, will be among the recovering countries. The outlook for Brazil is better than for most other countries.”

  Stocks opened down this morning. Traders are still jittery from yesterday’s sell-off, and the prospect of the coming earnings season is dark, at best. The Dow opened down about 140 points.

  The dollar is perking up as stocks fall. The dollar index gained a full point yesterday and is up another half a point this morning. It scores 85.2 as we write.

  So is this how people will wait out the “worst downturn since the Great Depression”?

72,744 people packed into Houston’s Reliant Stadium over the weekend to witness this year’s WrestleMania. That headcount brought in almost $7 million in revenue for the World Wrestling Entertainment Inc., its highest-grossing live event of all time. Attendance at the four-hour spectacle was the third highest in the stadium’s history, ousting even the 2004 Super Bowl.

In case you were wondering, the highest head count ever at the Texas stadium was a livestock and rodeo last month. No. 2 was a concert by Hannah Montana.

And here’s how GM is planning to get out of the worst crisis in its history:

Like a rickshaw, but expensive…

Behold the PUMA, the fruit of a partnership announced today between GM and Segway. The two-wheeled wonder will be available by 2012. Future buyers can look forward to top speeds around 35 mph and a maximum range of 35 miles on a single change, perfect for those confined to high-traffic areas… so long as it’s not raining… or cold… or really hot… or icy… and you don’t have to carry anything.

And talk about sex appeal!

We’re told the above is just a prototype and the final model will be notably different… hope there is plenty of space left on the drawing board.

  “Tell me you're kidding,” a reader writes responding to our worry over the future of state pensions.

“Do you honestly believe the feds are going to let public workers’ pension programs (or Social Security) go under? If it even looks likely, they'll grab your private funds, and in the interest of ‘fairness’ use the money to shore them up. An idea, I might add, suggested in an Op-Ed article in the WSJ by Joe Califano, head of the old HHS, back under Jimmy Carter (who these days looks good).”

The 5: Uh, no. We expected the depletion in pension funds to begin. But as you are, we’re sure the Feds will do anything they can to keep their promises flowing.

  “I am compelled to write and endorse home schooling,” writes another, agreeing with a slightly less rational plea from yesterday. 
 
“I have a bachelor’s in computer science, and got a ‘quick’ master’s in teaching 10 years later, thinking I’d go into public schools and change the world. I taught computers at private schools for 10 years before burning out. Currently, I substitute teach once in a while at a local high school.

“The amount of time wasted in a day on things other than education is mind-boggling. Condense the day to education only, and maybe two hours are spent learning. Depending on the teacher for whom I am substituting, I sometimes ask the students how they would change school if they could. It confuses them greatly. With all the on-demand videos and resources on the Internet, there’s no excuse for a parent to be afraid of home schooling. The all-important ‘socialization’ comes from other home-schooled children, sports, dance, etc.”

  “Congratulations, you have made it!” our last reader writes. He was nice enough to include this photo as proof:

“There are pirate copies of your movie I.O.U.S.A. on sale here in Thailand (for US$3). Actually, it’s an honor to be pirated, because usually they make copies only of normal, mainstream movies. There are hardly any documentaries, foreign movies, etc. But I did see Fahrenheit 9/11 and An Inconvenient Truth... I guess your movie is in good company.”

The 5: Just in time, the PBS Home Video version of I.O.U.S.A. is being released today.

Addison Wiggin
The 5 Min. Forecast

P.S. We’ll be taking a break from The 5 for the next few days. Agora Financial’s editors are converging on our Baltimore headquarters for a rousing editorial meeting. Wednesday and Thursday, we’ll gather at 14 West and refine our latest ideas, forecasts and investment themes. The market is closed on Friday, too, so…. so are we.

Enjoy the rest of your week… we’ll chat again on Monday.

P.P.S. One of the most important projects we’re discussing is the foundation of the Richebacher Society. We’ll follow up with some detail this afternoon.
 

• Bernanke back on Capitol Hill… “Fed speak” translations show more rate cuts, higher inflation
• Why a former Fed chairman gave the dollar a “slap in the face”
• Housing takes another turn for the worse… surprisingly bad new home sales data below
• Oil retreats from $102, but only for a moment… Byron King with a battle plan for oil’s next pullback
• Chris Mayer on the worsening U.S. water crisis… you can kiss Lake Mead goodbye

“The economic situation has become distinctly less favorable,” Ben Bernanke told the House Financial Services Committee yesterday.

With the euro breaching $1.50 for the first time and the dollar index at all-time lows, we thought maybe, just maybe, Bernanke would get an earful from at least one upstart young congressman trying to make a name for him or herself.

Alas… “Downside risks to growth remain,” he stressed in his prepared remarks. The Fed “will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks.”

Translation: Dollar be damned… more rate cuts are coming. What else is he going to say?

Meanwhile, across the globe to the right, a former Fed chairman is doing his best to usher the demise of the dollar in at a quicker pace.

Middle Eastern nations who drop their dollar peg would significantly decrease inflation,
Alan Greenspan told Saudis at a conference in Jeddah yesterday. Inflation in the Saudi kingdom is surging at roughly the same rate as the U.S.’s PPI, up 7%, a 27-year high. Likewise, in the UAE, inflation is climbing at a rate of 9.3%, a 19-year high.

“In the short term, free floating,” Greenspan said, “will not fully dissipate inflationary pressure, although it would significantly do so.” As if the dollar weren’t in bad enough shape… the former chairman of the Fed is telling Saudis to ditch the greenback.

“Talk about a shot across the dollar’s bow,” cries Chuck Butler from the EverBank trading desk.“A slap in the face! All those types of metaphors rolled together. The former Fed chairman who had his hands deep into the mess that started all this is telling people to abandon the dollar!

“I actually felt sorry for [the dollar] at one point yesterday. The selling was so strong, and by noon yesterday, the euro was trading 1.514! And all the currencies joined in. In the old days of football [when I played] this was called ‘piling on’…”

And pile on they did… between Bernanke’s testimony, Greenspan’s advice, durable goods and new home sales data, the lowly dollar didn’t have a leg to stand on yesterday.

The dollar index fell to a fresh record low of 73, and as Chuck mentioned, the euro breached $1.51 for the first time. The pound shot as high as $1.99, the loonie rose to $1.02 and the yen climbed to just short of 105. Like yesterday, the trade of the day was to sell the greenback.

“I’m going to be the first one to tell you that this has gone too far, too fast,” Chuck continues. “The euro spent less time in the 1.50 handle than it takes for you to read the book about ‘what a man knows about a woman.’ So if the markets stop, take a pulse and go back to fill in the gaps… that certainly seems in order right now.”

Not surprisingly, gold held record ground yesterday as the dollar circled down the bowl. After hitting $965 premarket, gold prices flat lined at $960 all day and still trade there now.

Durable goods orders fell 5.3% in January — the steepest drop in five months, evidence that the slowdown conceived in the housing sector is spilling over into the “real” economy. Yesterday’s Commerce Department report showed the first net fall in durable goods orders since October. But the larger-than-expected 5.3% drop erased all gains made over the past two months.

Defense orders led the way, you might be surprised to learn, falling nearly 20% in January. Orders for “transportation equipment” were down too, falling 13% last month. Computers and fabricated metals fared poorly as well, down 11% and 4%.

But housing isn’t done yet. New home sales fell 2.8% in January, to an adjusted annual rate of 588,000. That’s a 34% decline year over year — the slowest rate since 1995.

Likewise, the median price of a shiny new house slid 4% from December, to $216,000, said yesterday’s Commerce Department report. One year ago, the median new home price was $254,400, 15% more than today.

U.S. markets traded flat yesterday. Benchmarks enjoyed hefty gains after Bernanke’s testimony, but slowly sold them back as the day progressed. Most American indexes ended where they began.

IPOs worth more than $21 billion have been pulled off the global docket so far this year, reports Thompson Financial. Following 2007, the biggest year for IPOs in history, the $21 billion in dead deals marks the highest on Thompson’s record. In fact, this month will go down as the first February since 1992 when IPO activity declined from January.

UBS shareholders approved a $12 billion sovereign wealth fund injection at the annual shareholders meeting we told you about yesterday. The Government of Singapore Investment Corp. will now own an approximate 2-3% stake in the super-sized Swiss bank.

Oil prices backed off recent highs of $102. Traders took a day off buying light, sweet crude to new all-time highs and oil retreated to $99 this morning, mostly on news of a better-than-expected weekly supply report. By lunch time, prices were back up to $102.

“If oil does take a dive, it won’t last for long,” advises Byron King. “OPEC has already announced that if the price of oil falls, the cartel will just restrict output and drive prices back up. Thus, if oil prices decline, be ready to step in and bulk up your portfolio with the best of the oil finders and oil service companies.”

Naturally, Byron recommended three such companies for your “oil dive watch list” in his latest Outstanding Investments alert. Gain access to the OI portfolio by subscribing here.

As oil flirts with new highs every day, Congress is doing its part to ensure it reaches $150 per barrel.

The House approved a multibillion-dollar oil tax bill yesterday. Should the bill be approved by the Senate and President Bush, the bill will roll back two tax breaks for the U.S.’s five largest oil companies… one helps manufacturers compete against foreign state-owned oil companies, and the other gives U.S. companies tax breaks for using American oil and gas services.

Authors of the bill estimate the bill will cost those five U.S. oil companies $18 billion. The bill would then, in turn, use that money to invest in alternative energy research.

And on the scarcity front, Lake Mead, a critical water source for much of the Southwestern U.S., could dry up in the next 13 years, says a study by UC San Diego.

Researchers claim that along with natural evaporation and higher temperatures, the rapidly expanding Southwest population is sucking more H2O from Lake Mead each year than the Colorado River can replace.

That ain’t paint… Lake Mead at critically low levels

Lake Mead’s water supply system is already operating at half capacity… supplying water for over 8 million people in Las Vegas, Los Angeles and San Diego is no easy task.

“We were stunned at the magnitude of the problem and how fast it is coming at us,” said Tim Barnett of the University of California at San Diego. “Make no mistake, this water problem is not a scientific abstraction, but rather one that will impact each and every one of us that live in the Southwest.”

“The water level of Lake Mead has fallen so low that it threatens to dip below the water intake pipes,” Chris Mayer tells us. “These pipes, like giant straws, suck water out of the lake. So authorities there have fast-tracked a project to extend the length of the intake pipes closer to the bottom of the basin. Literally, we are getting close to the bottom of Lake Mead.

“There aren’t any places to draw new water. New pipeline projects take time and money. Meanwhile, population growth in Nevada is among the highest in the country. Something has got to give. One is that the price of water rights will rise significantly. The other is that people can expect many more water use restrictions out there.

“As an investor, you can own a company that owns water rights out West. You can also own the company that supplies pipes for new pipelines. We’ve got ’em both in C&C.”

Follow along with Chris in Capital & Crisis, including his “Blue Gold” water portfolio, here.

“I think some of your readers have some misconceptions about manufacturing versus services,” writes a reader. “I have been a marketing manager in a manufacturing business for 25 years. Direct labor costs seldom exceeded 13% of our total costs. As we continue to automate, that portion of our costs keeps falling. Selling, general and administration costs and R&D labor costs are many times greater than direct labor costs. Eventually, our direct labor costs as a portion of the total will be even lower, and whether we continue to make our products in Canada or the U.S. (we have plants in both countries) or move production to China, the net loss of income to North Americans will be miniscule.

“Our major costs are ‘internal’ service costs, some of which could be outsourced to other pure service companies. Whether a widget is assembled by robots here or by cheap labor in China doesn’t make much difference to our direct laborers. They will all become redundant eventually. The main value in a product is in its design, which is determined by customer need/desire (market research), research and development, engineering and general management. That is what we do in North America.

“Eventually, production will move back here to be carried out by robots. Either way, blue-collar direct labor jobs are gone forever. You must remember that China is an assembler of imported components. The Asian Tigers make a lot of the components that are shipped to China for assembly and sold in North America.

“North American industry should be focusing on manufacturing high-end components with high intellectual content and selling them to Chinese companies who can assemble the components cheaply.”

The 5 responds: In a recent interview we did with former Treasury Secretary Paul O’Neill for I.O.U.S.A., he suggested that many of the measurements we use for the economy… the ISM manufacturing index could be considered one… were created and discussed by economists who have ideas about the world more consistent with thinkers in the 1930s than the way the world actually works today.

His fear is if people revert to that way of thinking, the risk of protectionism and demagoguery — two trends prevalent in the politics of the 1930s — will also return. “Take a look at the candidates for president right now,” we paraphrase him from memory. “The only one within shouting distance of the economic issues the country faces is Ron Paul. But he comes with so much baggage on other issues he represents no one will listen to him.”

The S&P/Case-Shiller home price index “is a self-serving chart to make the housing situation look like a financial disaster,” another reader comments. “CLOs and CDOs aside, the housing situation is far better than the rate of change chart portrays.

“The year-to-year drop in housing prices to November 2007 moves housing prices back to the 2004 level. The rest of my input on growth in pricing and household wealth still stands. With the drop in fed rates, we do not hear much about ARM reset problems anymore. It is likely that the housing prices will bottom in 2008, and may have already done so.

“Here in Phoenix, one of the fastest rising and hardest hit markets, Realtors report that home sales are up and prices have stabilized since November.

“Too much gloom and doom is not constructive.”

We’ll keep that in mind,

Addison Wiggin
The 5 Min. Forecast

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

But really… you had to see this one coming:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Literally.

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

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

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

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

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

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

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

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

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

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

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

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

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

Cheers,

Addison Wiggin
The 5 Min. Forecast

• What MBIA, Ambac, Exxon Mobil and GE still have in common… and why it moved markets
• Home sales hit new lows, foreclosures new highs… where the fallout is the worst
• Jim Rogers on the U.S. recession… and how “it is going to get worse”
• A financial sector IPO we wouldn’t dare bet against
• Famous oil investor bets on $85 oil… Kevin Kerr on why you shouldn’t ride his coattails

Bond insurers Ambac and MBIA will keep their coveted AAA credit ratings, announced Standard & Poor’s yesterday… confirming the corruption and consistent inaccuracy in the ratings industry. Debt issued by both of these insurers will maintain the same credit rating as bonds from the likes of GE and Exxon Mobil… at least for now.

Ambac stock rose 13% on the news. MBIA shot up 17%.

Execs at MBIA were so emboldened by their AAA rating, so sure of their company’s ability to make money and pay off debt, that they decided to cut their entire dividend yesterday. The move will save MBIA some $174 million. Apparently, the $2.6 billion in recent stock and bond sales coupled with a $2.5 billion private equity injection wasn’t enough capital to let the MBIA elite sleep at night.

MBIA — a company with a $1.8 billion market cap — insures over $670 billion in bonds.

Markets rejoiced on the AAA news too. The Dow and S&P 500 furthered the day’s gains to close up 1.5% and 1.3%, respectively.

Existing home sales fell for the sixth month in a row in January to a new record low. Such sales fell 0.4% last month, to an annual rate of 4.8 million units sold, reports the National Association of Homebuilders yesterday. That’s the slowest pace since at least 1999, when the NAR started keeping track.

For what it’s worth, sales of existing homes are now down an amazing 20% from their 2005 high. The inventory of unsold homes also rose in January, by 5.5% to a 10.3-month supply, just short of a multidecade high. For perspective, during the peak of the housing boom in 2005, inventory fell as low as a four-month supply. As of January, over 4.2 million homes were for sale in the U.S.

What’s more, the national median home price fell yet again, now down to $201,100. This time last year, the average existing home fetched nearly 5% more… ouch.

Foreclosure filings skyrocketed 57% in January, year over year, reports RealtyTrac this morning. 233,001 homeowners filed in January, up 8% from December. Of those homes, over 45,000 were repossessed by loaners… in January alone.

Nevada, California and Florida led the way last month. An incredible one in every 167 homes in Nevada was in some stage of foreclosure during the month.

Not surprisingly, home wares supplier Lowe’s turned in a doozy of an earnings report yesterday. Fourth-quarter profit fell an impressive 33%. Same store sales dropped 7.6% during the last quarter of 2007, and the company said sales will continue to fall at least 5% in the current quarter.

If you can see a bottom to this whirlpool… you’ve got better eyes than we do. And better than this guy too:

“The U.S. is in recession,” Jim Rogers told reporters on a visit to Dublin yesterday. “It is going to get worse. They [the U.S. central bank] are printing money and are trying to prevent the recession — they are putting on Band-Aids,” he said.

“The Japanese did it and the Japanese still have not recovered 18 years later. As long as the [U.S.] central bank and the federal government keep making the mistakes, you will have a longer period of slowdown and it will be perhaps one of the worst recessions we have had in a long time in America.”

“History shows,” Rogers wrote in the foreword to our book back in 2002, “people who save and invest grow and prosper, and the others deteriorate and collapse.

“Artificially low interest rates and rapid credit creation policies set by Alan Greenspan and the Federal Reserve caused the bubble in U.S. stocks of the late 1990s… Now policies being pursued at the Fed are making the bubble worse. They are changing it from a stock market bubble to a consumption and housing bubble.

“When those bubbles burst, it’s going to be worse than the stock market bubble. No one, of course, wants to hear it. They want the quick fix. They want to buy the stock and watch it go up 25%… because that’s what they say on TV.”

“As of right now, U.S. economic growth is at zero,” said Alan Greenspan yesterday while at a conference in Saudi Arabia, offering proof that irony as an art form is not dead. “We are at stall speed. Recovery might take longer to emerge than it usually does.”

Visa unveiled plans to go public yesterday. In an SEC filing, the company said it would offer up to 446 million shares at $37-42 a pop. Thus, the company may raise up to $19 billion — the largest IPO in history by nearly a factor of two. AT&T’s 2000 IPO scrounged up a measly $10 billion.

Visa will be the last major credit card company to go public. While we dare not speculate on the short-term outlook of the IPO… if MasterCard’s recent offering is any indication, Visa’s will be the buy of the year:

There is no exact date set as to when Visa will begin trading, but rumor has it ticker “V” will be tradable by March 20.

Two of the nation’s largest 401(k) stewards saw frightening retirement withdrawals and loans in the fourth quarter. Fidelity Investments, the U.S.’s largest mutual fund provider, said yesterday that 401(k) withdrawals jumped 17% in December, the biggest decrease in the company’s history.

Great-West, which manages 3.5 million retirement accounts, also recently reported a 14% yearly increase in 401(k) withdrawals in 2007.

The dollar index fell again yesterday and overnight, plunging half a point this morning alone. Now barely clinging to a score of 75, the index is just less than a point from a new record low.

“There are so many people bearish on the dollar right now, including me,” added Jim Rogers in his speech in Ireland. “Normally, when that happens, something comes along to cause a rally, even if it is a bear market.” Despite a possible short-term rally, Rogers maintained his bearish position on the greenback, saying the dollar was set to “go down a great deal.”

“The dollar is going to lose its status as the world’s reserve currency,” Rogers asserted. “That is in the process of happening.”

The euro now trades on the high end of $1.48, less than a cent below its all-time high from November. The pound ticked up another penny, to $1.97. The loonie shot right through parity to $1.01, and the yen stood still at 107.

Wheat surpassed $12 per bushel for the first time yesterday in Chicago. Wheat for May delivery shot “limit up” 90 cents, or 8%, in after-hours trading — wheat’s largest single-day gain since October 2002.

While American wheat inventories remain at 1948 lows, we learn today that the U.S. export sales are up 56% since June compared with the same period last year. Yikes…

Light, sweet crude trades for 99 bucks this morning…off $1 from yesterday’s high.

“I think oil’s going to back off,” pontificated the legendary T. Boone Pickens last week, “The weakest quarter is the second quarter. We’ll drop $10 or $15 a barrel in the second quarter. I think we’ll be back above $100 in the second half of the year.”

The legendary energy investor told CNBC that he has taken on short positions in both light, sweet crude and natural gas.

“The risks of shorting this market right now are extreme,” advises Kevin Kerr, “and unless you have very deep pockets, let’s just say it could be very painful.” Just in case you’re thinking about riding T. Boone’s coattails on this trade, our Maniac Trader has a few words of caution:

“Sure, a slowdown in the global economy is bound to have some impact, and I am not discounting the potential for some money to be made on the short side. I just don’t have enough money to do it. I mean, a guy like T. Boone can afford to ride a crude position back down to $50 and still be long; I cannot.”

For Kevin’s latest resource buy recommendations, check out Resource Trader Alert.

Gold traders took profits yesterday as the market rallied, sending spot prices as low as $927. As we write to you this morning, an ounce of the stuff sells for about $935.

“Neither I nor my colleagues are economists,” writes a reader in response to yesterday’s discussion of manufacturing in the U.S., “but for years, we’ve been scratching our heads wondering how the U.S. economy can survive if it doesn’t make anything. A service economy is fine if it has a production economy to serve. This may be oversimplistic, but without a production economy, what is it serving?

“We can serve the production economies overseas, but sooner, rather than later, they will figure out how to service their own economies and won’t need us. It appears that the consumer classes in China and India, et al., are increasing exponentially. Soon they will arrive at critical mass — i.e., their middle/working class consumers will outnumber our middle/working class consumers. And once this happens, the USA will be expendable. They will no longer need to depend on the U.S. markets to buy their stuff. They will have their own markets to do that.

“I wish I could see a flaw in this thesis, but I can’t. In other words, I don’t see any way of avoiding our inevitable status in the not-too-distant future as a second-tier country, much like European countries were to us in the 20th century. Please show me how I’m wrong.”

The 5 responds: Sorry… no can do.

“I have been talking about the U.S. sending too many jobs overseas and out of this country for over a year now,” adds another. “Past and present trade agreements have allowed this situation to develop and continue. We have lost all too many blue-collar jobs, union jobs, foundries, mills, plants and factories — the type of jobs in which many could gain employment, prosper and raise a family. Outsourcing of U.S. white-collar jobs should be made illegal, as far as I am concerned. I fear for the future of this nation.”

The 5: One of your editors lives in a Baltimore complex called Clipper Mill — a former manufacturing plant and iron foundry, one of the largest on the East Coast. Baltimore’s first streetcars were built there, along with the columns that support the dome of the U.S. Capitol building.

After accidentally burning to the ground 10 years ago, nearly the entire lot was rebuilt into swanky hipster condos and apartments. The few little remnants that remained of the old mill were used to decorate this:

Why rebuild a factory when a there’s room for a pool?

“Being in the casting and machining business since the great 1994 renminbi devaluation has been rough,” writes a reader. “Our large customers, CNH, ITT, etc., threatened and did send our parts overseas to be manufactured. As a matter of fact, I sensed a perverse joy on the part of purchasing agents as they gleefully squeezed domestic industry and extolled their new Oriental partners’ ability to provide cheap parts and made their own people redundant, and therefore showed an increase in ‘productivity.’

“To counteract this, we started a China joint venture that has had high profit margins due to the currency valuation and tax/export rebates and income tax incentives. That all ended last month. Prices and costs for iron castings went up between 20-30% as the Chinese government tried to slow the growth of energy- and material-intensive industries.

“Three years ago, over half our industry capacity in the U.S. was in bankruptcy. Customers such as Caterpillar are finding a U.S. capacity shortage, as parts are now cheaper right at home than elsewhere. What did they expect?

“Prices are going up — fast.”

Best regards,

Addison Wiggin
The 5 Min. Forecast

P.S. Don’t forget… you’ve got just one more day to take us up on our Strategic Short Report trial offer. Dan Amoss’ initial subscribers just pocketed 173% gains on their Systemax puts, and his latest recommendation — shorting a famous U.S. homebuilder — is still below his buy-up-to price. Get your free three-month subscription here.