The U.S. service sector, savior of American consumerism, and roughly 90% of the American GDP, plunged into contraction during January for the first time in five years. The Institute for Supply Management reported early this morning its nonmanufacturing index dropped from 54 in December to 41 in January. That’s a monumental change. A score of 49 or lower represents “contraction” within the sector. January’s score of 41 is the first below 50 since March 2003. And the lowest reading since 2001.

The number is so bad, in fact, the ISM released its data at 9 a.m. EST this morning, an hour and change ahead of schedule, in an effort to quell any leaks that might spook the stock market. In spite of an early release, the Dow opened down over 200 points.

The average reader of The Washington Post has a more pessimistic view of the American economy today than at any time over the past 15 years, says the Post this morning.

80% of the people selected for the poll rated the economy as “not so good” or “poor.”

30% are bearish about their investments and financial prospects in 2008

60% believe America is already in a recession.

39% of those polled cite the “economy and jobs” as the No. 1 issue in the current presidential campaign, up 10% in the past three weeks alone, and more than double those who call the war in Iraq the No. 1 concern.

Only 19% view the economy in a positive light — the lowest level since June 1993.

These numbers come out just in time for Super Tuesday. More than 1,700 delegates are up for grabs in Democratic primaries and caucuses around the country today. Over 1,000 will stand up and be counted for Republican candidates.

Yawn.

Conventional wisdom will tell you “Democrats are bad for business.” Looking at the top campaign contributions so far during this primary season, Corporate Americans are gluttons for punishment:

Oil has declined steadily this week. Light sweet crude is down around $88 this morning. The market appears to be waiting and wondering if a U.S. or global slowdown will affect consumption. Or… if the Fed is willing to crush the dollar enough to hike the price past $100.

The dollar posted some big gains this morning on news that eurozone service industries have themselves shrunk to three-year lows. The dollar index rallied over half a point, to 76, this morning, sending the euro back down to $1.46.

“$1.4684 is a far cry from 82 cents, eight years ago!” comments Chuck Butler in a reminiscing frame of mind.

The euro could “experience a problem when the European Central Bank (ECB) finally gets around to cutting rates this spring,” Mr. Butler speculates. “The dent could take the euro to 1.40. But after getting past the initial blow of having lower rates, calmer heads will prevail and use this lower level as a springboard to push the euro higher. This is when I believe we will see 1.50, but not before suffering some rough times.”

Gold continued to fall in overnight trading, too. New York opened at $888 this morning… still a fair shot higher than the $253 we remember back in 1999. Buy.

Hedge fund investors yanked $7.7 billion out of Japanese funds in 2007 – over 20% of the nation’s total hedge fund industry.

Given the poor performance of the Nikkei et al., Nipponese hedge funds shed nearly $11 billion last year. Investors in such funds are no strangers to losing money. Japan’s 2006 performance was equally disappointing.

“All that pessimism creates some nice prices,” Chris Mayer comments. “I was in Manhattan on Friday attending an investment conference. One of the speakers was Jean-Marie Eveillard, a legendary investor who runs the First Eagle Global Fund. His favorite idea was to invest in Japan. He likes the ‘world-class manufacturers’ — some of them trading for cash on the books.

“Let’s face it — people in Japan live well,” Mayer adds. “They are relatively rich and live long lives. Unemployment is 3.8%. Crime is low. Japan is still the second largest economy in the world. It’s still home to many world-class companies. Infrastructure is good. There is a large and comfortable middle class.

“For the first time in a long while, Japanese real estate is rising. Plus, in Tokyo, the real estate market is strong. There are few vacancies. The prospect for increases in earnings looks good as old leases roll off.”

For Chris’ favorite Japanese real estate play, see your latest Mayer’s Special Situations alert.

Moody’s proposed a new rating system for CDOs and other complex debt securities today. Good timing there.

The new system would distinguish these securities from more legitimate bonds by rating them with a system of 21 numbers — not the traditional 21 letter system of AAA, AAA-, AA and so on.

Yeah… like it’s going to make a difference now.

Congress passed a bill yesterday making the words “In God We Trust” more prominent on the nation’s new dollar coin.

The motto was formerly etched on the narrow edges of the new coin — a creative touch meant to dissuade counterfeiters and provide more room for art on the face. Now, by law, it will return to the fronts and backs of the coins.

The provision was earmarked to a $555 billion spending bill.

Hmmn. Let’s see. The dollar index is down over 10%. And by the government’s own calculations, U.S. inflation jumped 4.1% in 2007 — the largest rise in 17 years. Fourth-quarter inflation soared past 6%. Seems like Congress ought to be a little less concerned with what’s written on the darn thing… and a little more concerned with what it’s worth. Yeah?

As we reported Friday, China is dealing with a nasty squall of winter weather. But just how bad is it? Probably worse than you think… check this out:

“I cannot help but say the media are out of control,” writes a reader. “They announce that Exxon Mobil, the second largest corporation in the land, made obscene profits of $1,300 per second, or about $78,000 per minute.

“How can they not make the dramatic announcement that the federal government deficit-spent at a rate 12 times as high, or over $1 million per minute? Or that the 2007 federal spending of $2.8 trillion is over $5 million per minute?

“Talk about obscene.

“We should remember the wise words of Cicero when he said: ‘The budget should be balanced. Public debt should be reduced. The arrogance of officialdom should be tempered, and assistance to foreign lands should be curtailed, lest Rome become bankrupt.’”

“The actual deficit for 2008 will be about $500 billion more,” writes another, “than the projected deficit of $410 billion. Please take a look at the table below from the U.S. budget Web site. The Bush administration’s projection of the 2008 budget deficit of $410 billion is off by about $500 billion — if the budget shenanigans of the past few years are any guide.

“Before you write me off as another nut, look at the bottom line in the table in the column ‘Debt at start of year.’ You will see that at the start of fiscal 2007, the debt was $8.451 trillion and that the debt at the end of the year was $8.949 trillion. The difference — that is, the real deficit — was $497.1 billion.

“Yet the government announced late last year that the deficit in fiscal 2007 was $162 billion. The difference between the actual $497 billion and the announced $162 billion is $335 billion. Remember, these numbers come from the official government Web site.

“The $335 billion credit to the budget was something you might find in Oz-land: the interest on the total obligation of the government to the Social Security Trust Fund, which is about $4 trillion (the interest rate was apparently something like 8%). The government’s own stats (below) show that the actual deficits have been $498-594 billion per year since 2003, far higher than the announced deficits.

“Please tell your readers that the government includes nonexistent credits in its numbers every time it announces the budget deficit. We are in even deeper doo-doo than we thought. I thank you, and so will your readers.”

“Regarding the ins and outs of the distribution of I.O.U.S.A.,” writes a reader, “I think you should take it that your loyal fans — and I’m one of them — won’t mind how you distribute your new movie, just so long as they can view or buy/download a copy ASAP.

“This story is a universal one: As you and Bill Bonner keep reminding us, there are people in every country (just about) who’ve been spending way ‘too much money they don’t have, on stuff they don’t need.’ Here in Ireland, we’ve raised this notion to a fine art and achieved (sic) a personal income-to-debt ratio in the region of 165% — which far exceeds the borrow-and-spend orgy that’s gone on in the U.S. or U.K. Most of this debt is tied up in housing (though we’ve built up prodigious amounts on credit cards, too) that is now sharply falling in value.

“There’s a much-quoted expression here that in regard to both our style of capitalism and our social attitudes, the Irish are ‘closer to Boston than Berlin.’ I don’t think Irish audiences will have any difficulty ‘getting the point’ of your movie or applying its lessons.”

The 5 responds: Slainte! We’re working on it. We’ll keep you posted.

Best,

Addison Wiggin,
The 5 Min. Forecast

P.S. As we write to you this morning, the Dow is down well over 200 points…today’s ISM reading has brought recession woes back to full force. While U.S. investors seem to spend every trading day “waiting for the other shoe to drop,” our international investing adviser Chris Hancock has found a global niche immune from the credit crisis… one that he thinks “could be the most persistent and reliable market boom in a decade.” You can learn about it here.

“I’m extremely worried,” our friend Jim Rogers told Fortune magazine over the weekend. “I just see things getting much worse this time around than I expected.

“Conceivably, we could have just had recession, hard times, sliding dollar, inflation, etc., but I’m afraid it’s going to be much worse,” he says. “Bernanke is printing huge amounts of money. He’s out of control, and the Fed is out of control. We are probably going to have one of the worst recessions we’ve had since the Second World War. It’s not a good scene.”

“I’m delighted to see what’s happening in Shanghai and Hong Kong,” Rogers said of the recent 20% pullback in many Asian markets. “As I’ve said, if things hadn’t cooled off, the Chinese market was in danger of turning into a bubble. I find this most encouraging… I would suspect the correction isn’t quite over in China. But I’m gearing up. I didn’t put in any orders for tomorrow, but I’m starting to prepare my list of things to buy in China. Whether I buy this week or this month or this quarter, who knows. But I’m starting to think about buying new shares in China for the first time in a while. And I’m not thinking about buying in America.”

U.S. benchmarks finished up about 1% or so on Friday, ending a week of big gains on Wall Street. Traders seemed mostly unfazed by the first monthly job loss reported by the BLS in four years. Microsoft’s bid for Yahoo and more whispers of bond insurer bailouts captured investor attention, and thus another day of gains for U.S. investors.

For the week, the Dow rose 4.4%, while the S&P shot up just short of 5%. That’s the best weekly performance for both indexes since March 2003. The Nasdaq posted a jump of its own, up 3.8%, its best week in 18 months.

And the good vibes spread to Asia, where markets are sharply up this morning. The Shanghai Composite gained over 6%, while benchmarks in Hong Kong and Japan rose about 3%.

Over 302,000 “investors” tuned in to CNBC during business hours in the month of January, the best month for the network since September 2001. From 5 a.m.-7 p.m. all month, the nation’s most popular business network had 28% more viewers compared with January 2007.

Proof, perhaps, that people care about their money only when they are losing it.

After briefly dipping into a score of 74, the dollar index staged a small rally over the weekend. Now with a score of 75.3, the index is just short of 1 point from its all-time low… better than last week, but still frighteningly low. The euro still trades for $1.48. The pound lost a shilling, down to $1.97. The yen stood still at 106.

We too see a dollar ready to test new lows, as we explain in the second edition of Demise of the Dollar… due out in a month. As far as the greenback is concerned, we’ll keep a close eye on it this week. Both the European Central Bank and the Bank of England meet this week… stay tuned for their rate decisions and subsequent “guidance” statements.

Gold fell off a cliff on Friday, sliding from all-time highs of $936 to just barely above $900 this morning. Can you say, “buying opportunity”?

“I can think of 11 good reasons why it is still early to buy gold,” suggests our gold adviser Ed Bugos:

1 – Valuation — the most important, yet overlooked commodity on the board
2 – U.S. dollar still over-owned, diversification and/or new reserve currency still needed
3 – Worldwide gold reserves are stagnant and mine production is shrinking (peak gold)
4 – China’s gold and futures exchanges just now launching access to gold investments for retail investors
5 – No sign of an end to cheap money policies despite a sizeable inflationary threat
6 – Coming bear market in shares to provide extra fresh safe haven “liquidity”
7 – Seasonal trends are favorable until about May-June
8 – 2008 U.S. election uncertainty
9 – Geopolitical uncertainty / wild card
10 – U.S. budget deficit to widen on recession and current stimulus plan
11 – Confidence in Fed impaired as Bernanke seen to panic on latest rate cuts

We’ll consider today’s federal budget proposal and Jim Rogers’ and John Williams’ comments on the dollar above as reason Nos. 12 and 13.

“This Valentine’s Day,” writes our Kevin Kerr this morning, “the vast majority of men may put off buying that platinum anniversary or engagement ring and opt for roses or a box of chocolate.” Platinum prices have surged dramatically. Since Friday, April platinum has added $32, to $1,770 per ounce, in New York, a new record all-time high.

“The ultra-precious metals,” says Kevin, “are not a futures market for the squeamish, but for those brave enough, it can be some of the most lucrative trading around.

“The power outages in South Africa that drove platinum into the stratosphere,” Kevin notes, “didn’t just come out of the blue. The government knew it needed more power plants and that it had to lower power exports. (Hmmn. Sound familiar?) There is only so much juice to go around, after all, and mining (heavy-duty deep mining) takes a lot of juice.

“Many of the mining shares that are getting hit will most certainly rebound once this problem is resolved. The next two years are supposed to be the worst, and therefore are going to offer some very good buying opportunities for the longer term.

“Remember, South Africa is the world’s second largest gold producer and the absolutely the biggest platinum producer on the planet.”

“A great game of resource strategy just got a lot more intriguing,” writes Dan Denning from his perch down under, adding to our international intrigue today.

“Just days before BHP’s London deadline to make a formal offer for Rio Tinto, the Aluminum Corp. of China (Chinalco) swept in from the left flank to seize 12% of Rio’s U.K. listing. The $15.5 billion raid included an American wingman. Alcoa is a junior partner in the deal, and it gives Chinalco a 9% stake in Rio’s dual-listed corporate structure.

“Chinalco’s move gives it a seat at Rio’s table, and thus a voice in the ongoing negotiations between Australia’s two biggest mining stocks about their collective future.

“Not a bad weekend if you’re the China Development Bank, one of Chinalco’s financiers. And not a bad weekend if you’re a strategic policymaker in China. The move does not kill the prospect of an OPEC of iron ore-united Pilbara operations under the BHP banner. But it will force BHP to increase its offer for Rio, or recognize that it’s been outflanked by a strategic customer.”

Wesley Snipes was acquitted of felony charges of tax fraud and conspiracy last week.

You may remember our brief coverage of the new face of the anti-tax movement. Somehow, a judge bought his plea of ignorance. He was found guilty on three misdemeanor counts, which might involve a year or so of jail time.

But before you tear up your 2007 W-2… keep this in mind: Both of Snipes’ financial advisers were convicted of felony tax evasion and conspiracy and will do a spit more in the joint than the B-List movie star. And the IRS issued a statement immediately after the verdict: Snipes, despite his acquittal, still owes taxes on the $38 million he made from 1999-2004. Man, can’t a brother catch a break?

Snipes should have leveraged down on the Giants yesterday. According to the official Web site of the Professional Handicappers League, the “moneyline” on yesterday’s Super Bowl was +325 to +405 in favor of the Patriots.

So confident were the media — and the Patriots themselves — that this was going to be a blowout that every $1,000 you put down on a Giant’s win would have not only returned your initial stake, but up to $4,050 more. We suspect there are some very angry bookies out there this morning.

“You seem to be worried about the Chinese and Russians buying U.S. assets by the truckload,” notes one reader, “but isn’t that a good thing? First, it helps our economy, and second, it shows that at least some people have faith in the good old U.S., which I know you don’t. And also, the more other countries own the U.S., the less likely it is that they will do anything stupid militarily or otherwise, because they would also lose.

“You often say the Chinese may dump the dollar or use its military muscle against the U.S. in the future, but I don’t think so. If they did, who would buy their useless junk? It would be same as killing a golden goose…. which the U.S. is to them.

“Actually, this is an important point: Nationalism and separatism are how the world has operated, and this has been a problem before. But as the world gets more fused together, so that all the countries are joined at the hip, only then we will have a chance to lasting peace.”

The 5 responds: Au contraire. We’re grateful to the Chinese. Who else would lend us the money to keep up our spending? We’re grateful to the Russians, Singaporeans and the Abu Dhabites, too, for their massive sovereign wealth holdings. Who else would bail out the Wall Street banks as they take a bath on the homes we’ve moved into?

And if you read a little more carefully, you’d notice we were “taking the piss out of” (if you’ll pardon the British expression) those who think keeping the Chinese or the Russians or the Arabs out of the U.S. is a good idea right now.

“The fact that oil company (Shell, Exxon Mobil) profits are seen as ‘obscene’ or outrageous is a sad commentary on a ever more envious society,” opines another reader. “I don’t recall anyone feeling sorry for these same companies when they were struggling to make a profit with oil prices in the low teens. I certainly don’t remember the government looking to bail them out with the same fervor that they are suggesting punishing them now.

“Profit is profit. As long as it is garnered within the rules and laws that govern business, leave those that make profits alone. It’s those profits that drive our economy.”

The 5: The gentleman who called the profits “obscene” was a union rep in London. What else do you think he’s going to say? We’ve done quite well on our oil positions, thank you.

Oy,

Addison Wiggin,
The 5 Min. Forecast

P.S. Not only is it important to let the Chinese, Russians and sovereign wealth funds buy U.S. assets, but in some cases, it may provide you with the strategy you need to protect your own retirement over the next decade. For our report on this $2.5 trillion retirement fund, click here.