• Markets fall… why you should expect more pain in the coming days
• Thus, time to sell? Byron King on managing your portfolio during these turbulent times
• How holding cash could be the worst investment of them all… the latest stunning CPI report
• Washington to the rescue… could an “economic stimulus” revive ailing markets?
• Kevin Kerr on a domestic bull market alive and kicking
• Plus… a die-hard Ron Paul supporter who’s not voting for Ron Paul

Sell, baby… sell. That was the word on the Street yesterday. And sell they did.

Citi’s horrid earnings announcement, lousy retail results and wholesale prices rising faster than they have since Flashdance was a box office hit all conspired to hand the major indexes their worst day of this new year.

The Dow fell 277 points, or 2.1%. The Nasdaq and S&P 500 fared even worse, down 2.5% each.

It’s not over yet. Intel issued an earnings warning after the bell yesterday, which will more than likely drag techs down all day today. Wells Fargo failed to beat estimates in its earnings announcement. Big surprise there. JP Morgan missed expectations in an earnings announcement of its own.

Washington Mutual, Merrill Lynch and Bank of America will report earnings this week too. We suspect none of them will bear good news.

And for what it’s worth, the market malaise in the U.S. spread abroad overnight. Chinese, South Korean, Australian, Philippine and Taiwanese markets all fell over 2.5%. In Japan, the Nikkei 225 plunged 3.4%.

English and German stocks fell 1%. France was down 0.3%

“It might be time to lighten up on your common stock holdings,” Byron King advised his Outstanding Investments readers yesterday. This is the third time since the Bear Stearns revelation back in July that we’ve been in the position on looking ourselves in the mirror, asking what now?

“If you are nervous about the prospect of a looming bear market,” King counsels, “sell some portion of the winners in the portfolio and take the funds off the table. Hold the cash in reserve for future opportunities. How much should you sell? Don’t feel bad about selling 10% or 20% of your shares and booking the gain. It is better to pay taxes (especially on long-term capital gains, at 15%) than to absorb losses. And by all means, stay away from margin debt.

“The message to take away from the past few months of market volatility is that the days of easy credit are over. The steadily appreciating — and sometimes irrationally booming — stock markets of the last 20 years or so are probably coming to an end. There are many implications in all of this, not the least being that many of the hedge funds that have come into existence in recent years, as well as much of the hedge fund trading, are doomed propositions. Don’t be surprised to see a lot of unloading in the realm of energy futures and metal holdings as capital-starved firms do the equivalent of burning the furniture to stay warm.

“But whatever happens, we still believe — for many reasons — that the energy and natural resource sectors are and will remain good places for investment. Through thick and thin, we believe that gold and oil will generally follow rising trends.”

Of course, holding “cash” if it’s in U.S. dollars isn’t exactly a smart move these days, either.

Today’s Consumer Price Index (CPI), for example, shows that prices for food, energy and haircuts rose an average 4.1% in 2007 – their highest rate since 1990. Energy soared an impressive 17%. And food is up nearly 5% since this time last year.

Of course, if you don’t eat, drive, heat your home, turn on lights or watch football on TV, your cost of living got only 2.4% more expensive this year.

Looking at the most recent numbers, CPI rose 0.3% in December. Over the last three months of the year, consumer inflation rose at an annual rate of 5.6%. Wherever you’re holding “cash,” if it is in U.S. dollars and not yielding 6%, you’re losing money.

Currency traders endured big swings in dollar trading yesterday. The dollar index sank like a stone at the U.S. open, coming less than a point away from its all-time low of 74.4. But within hours, the dollar recovered and continued a slight rally in trading overnight.

The euro is clinging to $1.48 like a 4-year-old whose parents are leaving for a dinner party. The pound has almost managed to stem its bloodletting of late. The queen’s currency has steadied itself at $1.97.

Alas, the yen proved to be the big winner overnight, as risk aversion took full effect around the world. Japan’s currency rose to 2 1/2-year highs versus the greenback, up to 106.

“In the absence of the gold standard,” former Fed chair Alan Greenspan wrote back in 1966, when he was still hanging with Ayn Rand and blowing sax in nightclubs on the Lower East Side, “there is no way to protect savings from confiscation through inflation. There is no safe store of value.”

Gold’s price fell victim to yesterday’s sell-off, as well. The metal’s price has fallen over $30 from Monday night’s high of $914, down to as low as $875 this morning. Gold is rebounding as we write, inching into the $880 range.

“All the stars are still aligned to catapult gold into the lead vis-a-vis the other commodities this year,” reports our gold man Ed Bugos. “You have heightening political instability in the Middle East, wars, financial crises, the election, tight supplies, dwindling mine production and a growing sense that central banks are going to continue inflating until Mammon himself drowns in green.

“It is conceivable that it can rally another $300 in the next few months before the seasonal weak period kicks in during the second quarter. For now, at any rate, there’s little sign of a top. This move is long overdue.”

Oil fell yesterday as the market succumbed to the “recession = less energy demand” theory. Prices fell $2, to $91, during the sell-off, and then dropped another buck overnight as rumors leaked that today’s inventory report would show an unexpected increase in crude supplies. As we write, black gold sells for about $90 even.

While heads were rolling on Wall Street yesterday, Ben Bernanke and Nancy Pelosi shared a nice cup of tea in front of the cameras:

Washingtonians drooling over rumors of an impending “stimulus package.”

This pretentious photo op was preceded by a 27-page Congressional Budget Office report, which recommended the wonks and pols do what they love to do best: spend your money. Who knows what they’ll settle on at this point — housing crisis funds, tax credits, Social Security boosts, expanding unemployment insurance — but never fear, they’re sure to be multibillion-dollar endeavors.

“This is all beginning to remind me of Japan in the ’90s,” laments EverBank’s Chuck Butler. “Their gov’t kept coming up with one stimulus package after another, only to fall deeper into their decade-long funk…

“Could the U.S. be headed into the same type of funk? I would have to think that the growth engine in the U.S. would keep us from that, but Japan didn’t have the debt that we have going against us, nor did they have the housing and collateralized debt obligation/credit default swaps meltdown, nor were they fighting a war… YIKES!”

The Baltic Dry Index fell for its sixth consecutive day yesterday. The measure of global raw material shipping fell by about 4.2% — we hear its biggest drop since 1989. Looking at the premarket data this morning, the Baltic seems set for another doozy of a drop.

On Monday, we learned “cotton acreage and carryover supplies have dropped dramatically,” reports our Maniac Trader Kevin Kerr. “As more and more farmers shift out of the cost-intensive, low-margin cotton to things like wheat, corn and soybeans, supplies of cotton will dwindle even further.”

Consequently, yesterday, the cotton market hit a two-day limit-up rally of over 600 points.

“The volume of buying was so swift and merciless that the ICE (the electronic trading platform) had to shut down on Monday and only pit orders were being accepted, which made for an even more chaotic situation. It wasn’t a good sign, since all of the NYBOT products are supposed to go 100% electronic at the end of February.

“Anyway, cotton is delivering significant profits, and I expect it to go higher.” If you’re not trading these markets alongside the Maniac, maybe you should be.

Ferrari unveiled its first-ever biofuel-powered sports car this week. The penultimate luxury automaker showcased its new F430 Spider concept at the Detroit auto show on Monday, the first of the Ferrari fleet to consume E85.

The car will run on a mix of 85% corn and 15% gas, perhaps the most popular blend here in the States. It would appear that even niche brands like Ferrari are preparing for the government-mandated future of ethanol. We haven’t heard any revised MPG data, but we’re guessing it’ll consume corn at an equally stunning pace as its gas-powered predecessor. But hey… it’s got snazzy green stripes! Must be earth friendly…

“I have been doing business in China for 17 years,” writes a reader. “The RMB (renminbi or yuan) rate was always fixed, and for a long time was 8.2 to $1. Starting in 2006, the Chinese started a gradual upward valuation of the currency. On Jan. 16, 2007, the rate was 7.79 to $1. On Jan. 14, 2008, it was 7.25 to $1.

“While not freely convertible in the Western world, I can assure you that in the Eastern world, you can change a pocketful of RMB to any currency you wish at the posted rate of the day, which generally is less favorable to the dollar as each day passes.”

The 5 responds: The Chinese are in a bit of a quandary over pegging their currency to the U.S. dollar. The yuan was down 9% against the euro in 2007. So what are they to do?

“The changes [in their dollar peg] this month alone,” reported the Telegraph yesterday, “would see a 15-16% hike on an annualized basis, and markets are starting to estimate that the gain may be as much as 9% over the year. That would bring the total change since the government abandoned the fixed peg in July 2005 to nearly 20%.”

Officially, the Chinese aren’t dropping the peg. But 20% in less than two years sure tells a different story. Of course, if the dollar were to rally or even hold steady, you’d see a reversal in these changes in a heartbeat. The real danger is a sudden drop in the dollar. That would spook the Chinese even more and exacerbate the problem. Goodbye, greenback.

“I look forward to your 5 Minute Forecasts every day,” writes a thoughtful reader from Texas. “I always get them just in time for lunch.

“Ron Paul used to be my congressman, back before the last time Texas was redistricted. I wrote letters and e-mail to him frequently about issues that concerned me, and I always received prompt responses. (In contrast, I once wrote a letter to then-Gov. Bush’s office regarding his policy on states’ rights. It took six months to get a response, and I wasn’t encouraged by what it said.)

“I met Dr. Paul on a couple of occasions — he came into a store I owned in San Marcos, Texas, one day to talk to some of my patrons about his ideas. I found him to be personable, down-to-earth, a man of deep conviction and integrity. Just the kind of person we need to be president. In my opinion, his only shortcoming is that he doesn’t really have a “presidential” charisma.

“I’ve been really excited about all the Ron Paul bumper stickers, yard signs and overpass banners, as well as the attention he’s received from other readers. It gives me hope for the direction the mood of conservative voters is taking.

“All that said, I will not vote for Ron Paul in this election. Even if he were elected, he would not be able to implement the changes that this country needs to get it back on track. He would need the support of the legislature, and unless a whole lot of The 5 readers suddenly decide to run for the House and Senate in their districts, he wouldn’t get it. No (other) incumbent has the integrity and political nerve to do what needs to be done. It will cause a great deal of short-term pain, and that won’t win re-elections.

“As you pointed out yourself in yesterday’s 5, “… the country will need a financial crisis before people are willing to listen to ideas like those espoused by Dr. Paul. And… if current trends are any indication, it looks like it’s going to get one. Probably a doozy.”

“That’s going to happen, no matter who is elected. I adore Dr. Paul (as a congressman) too much to have it happen on his watch. Come to think of it, that may be just the right reason to vote for Hillary or Obama!”

Addison Wiggin,
The 5 Min. Forecast

P.S. “I.O.U.S.A.,” says a LA Times article covering the Sundance Film Festival, “as it cautions us about the problems we are getting into with a national debt as big as the Ritz, might be the most unexpectedly frightening movie in the festival.”

We’re heading out this afternoon. After a rather circuitous route through New Hampshire, we’re arriving in Park City, Utah, tomorrow night. The festival begins on Friday.

Surprised as we are about it, we’re kind of anxious about the whole thing. There are supposed to be 50,000 attendees at the festival this year. Check it out: “Small Town, Large Impact”.

According to The Wall Street Journal over the weekend, the writers strike in Hollywood could actually be working in our favor. A year from now, there will be very few completed movies on the market. That makes the completed ones in this festival all the more attractive to prospective distribution companies. Of course, they still have to like the movie. That part remains to be seen. Heh.

• U.S. markets stage strong comeback… back to normal or sucker rally?
• Citigroup drops the bomb… a quick and dirty account of the latest carnage below
• Inflation at 26-year highs, retail sales slump… is anyone not calling for recession?
• Bush pleads for more oil… why the Saudis won’t be saving us this time
• Can’t afford your new home? Burn it down… Foreclosure arsons flaming up across U.S.

You know you’re hurting when IBM posts your most exciting news of the day….

The U.S. stock market rallied yesterday, sending the Dow and Nasdaq up about 1.5% and the S&P 500 up just over 1%. Nearly the entire day’s gains were fueled by an early-morning earnings announcement from IBM. Big Blue beat fourth-quarter earnings estimates by a handsome margin.

But we’re willing to bet very few people noticed this: IBM’s outsized profits were the result of currency moves in its global sales.

“If you take out the currency component,” Chuck Butler from EverBank points out, “IBM’s sales increased 4%, not the 10% for revenues expected. Even big old (boring) IBM can make some money in the currency markets!”

In all, the move shows how desperate the Street is for good news.

And with good reason. Citigroup announced a cornucopia of bad news this morning:

– $18 billion write-down
- $12.5 billion cash infusion from outside investors, including Government of Singapore Investment Corp, Saudi Prince Alwaleed bin Talal and former Citi CEO Sandy Weill
- 41% dividend cut
- 70% decline in year-over-year revenue
- a 4,200 job cut — at minimum
- $9.8 billion net loss — the biggest quarterly loss in the bank’s 196-year history.

Merrill Lynch, Wells Fargo, JP Morgan and Washington Mutual all report earnings this week. While Citi is expected to be the worst of the bunch, similar write-downs and losses are practically guaranteed.

When the dust settles, this might be the worst quarter for financials since the Great Depression.

Rep. Henry Waxman, chair of the House Oversight and Government Reform Committee, has requested Chuck Prince, Stan O’Neal, and Angelo Mozilo to testify at a House hearing next month.

Congressman Waxman wants to ask these former Citi, Merrill and Countrywide CEOs if their bloated salaries and severance packages were “justified in light of your company’s recent performance and its role in the national mortgage crisis.”

It’s so easy to be cynical about Congress on this one… we’ll have to pass. At least it will make for interesting TV.

Neither is there any relief in sight for the economy:

Inflation, for example, at the wholesale level rose to 26-year highs in 2007, reports the Labor Department this morning. While the producer price index managed a tiny 0.1% fall in December, the government reported this morning that total 2007 producer inflation rose to 6.3%, a level not achieved since 1981.

The retail season was rather anemic, too. Total monthly retail sales fell 0.4% in December, says the Commerce Department today. The “biggest shopping month of the year” proved to be the sharpest monthly decline in retail sales in six months. November sales were revised down to a 1% gain, from a previously recorded 1.2%.

And if that didn’t fan the recession fire enough, the National Retail Federation also lowered its 2008 sales forecast to 3.5% — its weakest pace in six years.

And the Baltic Dry Index, which is a measure of freight costs for shipping dry goods like coal and grains, just recorded its biggest two-day drop since its inception back in 1985. It’s now down about 30% from its all-time high in November.

“The slowdown in freight has devastated the shippers,” comments Chris Mayer.“Take Excel Maritime, which was $80 in October… It’s about $30 today. That’s pretty typical. Most shipping stocks have been cut in half. Just another point of evidence that a recession is hitting the U.S.”

The mainstream seems to be taking notice too:

According to The Economist, almost 60% of Americans believe we are in recession.

“High energy prices can damage consuming economies,” President Bush mumbled under his yarmulke today while on a trip to the Middle East. “When consumers have less purchasing power, it could cause the economy to slow down.”

“I hope OPEC nations put more supply on the market,” he suggested. “It would be helpful.”

Aside from threatening Iran, President Bush was visiting the Middle East in hopes of negotiating an OPEC output increase. Iraq is not a planned stop on his itinerary.

Saudi Arabia, perhaps OPEC’s most powerful constituent, will not increase output for the sake of the U.S. economy.

“A recession in the U.S. is very significant to the oil market and demand,” says Saudi oil chief Ali Al-Naimi. “I’m sure that no one would look with pleasure upon a recession in the U.S. But we will raise production when the market justifies it. This is our policy.”

Even if Saudi Arabia could increase their oil output, which is a debate in and of itself, they won’t be doing so for the sake of U.S. consumers. “Over the years,” the sheik continued, “the U.S. has played an important… and appreciated role in the development of Saudi Arabia. However, some people mistakenly think that the [relationship] is controlled by how much oil the United States imports from Saudi Arabia.”

Take that, W.

Gold popped as high as $914 yesterday, setting yet another record high.

There are few assets outperforming gold during this rocky first month of 2008. While the U.S. stock market has fallen 4-5%, gold is up over 8% since Jan. 1.

“The new gold futures exchange in Shanghai,” comments Ed Bugos on our mention of the new exchange yesterday, “is designed for retail investors. According to press reports, the exchange traded one-third of the average Comex daily trading volume on its first day and gold was trading at the equivalent of $1,000 per ounce.

“That’s a $100 premium over the international gold price.

“The Chinese exchanges are still cut off from the rest of the world, which is the reason for the discrepancy. But there is little doubt in my mind that besides the debt crisis and the central bank response, the launch of futures trading in gold on the SFE last week is responsible for the bullish take off in gold this month.”

U.S. mutual fund investors will likely be hit with the biggest tax bills in market history this April.

According to the Financial Times, American mutual funds will most likely ring in a record $350 billion in capital gains taxes for their 2007 performance. Despite a rocky second half, 2007 mutual fund investors will pay more in taxes this year than during the height of the tech boom, whether they sold their positions or not… ouch.

The spike in foreclosures heated up another trend in housing last year: arson.

Allstate has seen a significant spike in arsons among homes in foreclosure, reports Fortune magazine. In California, one of the states hit hardest by the subprime crisis, “questionable” residential fires increased by 76% in 2007.

With “untold thousands of homeowners struggling with ballooning subprime mortgage payments,” reads a report from the Coalition Against Insurance Fraud, “fraud fighters are watching closely for a spike in arsons by desperate homeowners who can no longer afford their home payments.”

Apparently, this is a common problem when the housing market slows down. Go figure.

“Today’s news about Citi,” writes an overseas correspondent, “was enough to inspire me to move another huge chunk of our savings out of Citibank and into another account.

“I also noticed Citi is seeking more sovereign wealth money — from Abu Dhabi — after being rejected for same from China, which is no longer interested. Wow. Beijing thinks Citigroup stinks so much they don’t even want it.”

Yesterday, a reader wrote: “There is not a shred of fiscal conservativeness among the current batch of presidential candidates.” And then the mail came…

“Obviously, the only information he’s been fed is from the biased, tightly controlled media,” says one reader. “As everyone should know, Ron Paul is the ONLY true fiscal conservative running for president. And he IS running for president! He wants to repeal the income tax, the inflation tax and the 16th Amendment.

“Of course, along with this, he will drastically reduce government spending. I’m sick of people whining about the government, the taxes and the welfare state and then refusing to vote for a stellar candidate when given the opportunity. The whiners will get what they deserve if their whining is not accompanied by action. Do you really, truly want change? Then quit whining and vote Ron Paul for president.

“If there is to be any shred of financial hope for the USA within the next four years,
writes another, “it lies in Ron Paul winning the election. If not, the fiscal calamities promised by this and other prognosticating readers are essentially guaranteed

“Ron Paul,” writes a third, “has very sensible ideas, including the unusual notion that elected representatives, who swear to uphold the Constitution, should actually do that.”

And so on… we received about 30 responses similar to these.

The 5 responds: Here’s the problem. Yesterday, Paul Krugman, writing in The New York Times responded to the increased fear among Americans that the economy is heading into recession.

“Since this is an election year,” Krugman writes, “the debate over how to stimulate the economy is inevitably tied up with politics. And here’s a modest suggestion for political reporters. Instead of trying to divine the candidates’ characters by scrutinizing their tone of voice and facial expressions, why not pay attention to what they say about economic policy?”

He then goes on to review the economic policies of all the candidates. Except one. He conveniently forgets to mention Ron Paul. The only candidate who has actually ever studied or remotely understands economics… and the country’s biggest economic populist (blowhard) doesn’t even mention him.

What can you do? Lest we begin to sound like a recording, the country will need a financial crisis before people are willing to listen to ideas like those espoused by Dr. Paul. And… if current trends are any indication, it looks like it’s going to get one. Probably a doozy.

Cheers,

Addison Wiggin,
The 5 Min. Forecast

P.S. If you’re interested in joining us in Vancouver this summer, today’s your last chance to take advantage of our early registration pricing. We’ll hold our annual Investment Symposium in late July again this year at the lovely Fairmont Hotel, Vancouver. If you’re already thinking about being a part of this incredible event, sign up today and save yourself a couple hundred bucks. See you there…

P.P.S. Thought you might get a kick out of this… we’ve seen several folks looking for tickets to the premiere of I.O.U.S.A. on Craigslist in Salt Lake City. Reminds me of my misspent youth searching for tickets outside sold-out Grateful Dead shows.

By the way, if you do have tickets, or know of someone who does, please stick around after the premiere for a Q&A session. David Walker, the federal government’s chief accountant, and Bob Bixby, director of the Concord Coalition, will be there to field the tough questions. Not exactly Jerry Garcia and friends we know, but should still prove to be a stimulating evening.

• Fortunes await the wise during stock market’s “biggest challenge” since 2000-2001
• Citi’s troubles just beginning… Why the words “level 3” might soon be infamous
• Gold busts through $820… but one major investment bank calls for $750 by 2008
• Oil traders’ eyes on Mexico… Diesel’s all-time high… Jet fuel propels rising airfares
• Ron Paul sets a record of his own… even professional wrestlers support the good doctor

The more things change, the more they stay the same.

On Feb. 15,1999, then Treasury Secretary Robert Rubin participated it what we may call the most wildly arrogant cover Time has ever published:

Rubin, Greenspan and Summers: The Committee’s work is never done

Apart from the obvious hubris of this cover, we include this picture because we are students of irony.

As you know, Rubin has been called on again… this time to save Citigroup from its exposure to subprime lending. Rubin will temporarily replace the rapidly departing Chuck Prince as CEO.

And what a mess he will face. According to a MarketWatch article, Citigroup now holds over $134 billion in what it calls “level 3 assets.”

“Level 3” is Citi’s most frightening valuation of assets. From its own 10-Q filing with the SEC: “Level 3 — Model derived valuations in which one or more significant inputs or significant value drivers are unobservable.” (Citi added the emphasis, not us.)

In other words, Citi owns “$138 billion in assets” void of any reliable price, because no one is crazy enough to buy them. The last time we heard talk like this was when Bear Stearns told its fund’s investors that its assets were literally worthless.

The subprime debacle is just another in a long line of ‘liquidity’ crises that define Rubin’s post-’80s career. He talks candidly about them — Mexico, 1994; South Korea and the Asian Contagion, 1997; Russia and Brazil, 1997-1998; LTCM, 1998 — in his book In an Uncertain World, in the documentary Commanding Heights and in the interview we did with him for our own upcoming book and documentary.

The irony: When the Time cover was published, the Committee to Save the World and the editors of Time thought they were out of the woods. The U.S. stock market collapsed a year later. And the rest is recent history. Welcome back, Bob. As the Chinese say, “May you live in interesting times.”

Citigroup’s barrage of bad news pulled the U.S. markets down about 1% by early afternoon yesterday. Traders recovered a bit by the closing bell… but the Dow lost 0.4%, while the Nasdaq and S&P 500 fell 0.5% each.

“In the unwinding of the mortgage bubble, the stock market faces its biggest challenge since the unwinding of the tech bubble in 2000,” writes Chris Mayer this week to his Capital & Crisis subscribers, echoing our own sentiments. Greenspan went on record in early September saying he thought this episode would go down in history as one of the greats along with the 1837 and 1907 banking crises.

But it’s not all bad. “Painful as it may be in the short term,” Mayer cautions, “markets like these carry the seeds of fortunes. Think if you could roll back the clock to 2000 and 2001 and you knew what you know now. You’d make a bundle. You’d be beside yourself with giddiness about how much money you’d make.

“The point is that even in that tough market, there were lots of things to buy. There are surely such winners-in-waiting in today’s stock market, too. We just have to find them.” Chris has packed the C&C portfolio with a litany of such goodies. You can find them here.

Yesterday’s drama in the stock market fueled another sell-off for the dollar. The greenback fell against all 16 actively traded currencies yesterday. Amid the carnage, the euro set another record high by digging a tad deeper into the $1.45 range. Likewise with the pound and yen, both furthering their distance from the dollar in their respective $2.08 and 114 handles. The loonie ticked up to another new high of $1.08.

And surprise, surprise… the dollar index struck a new all-time low this morning… 76.0.

Gold soared to fresh 27-year highs overnight. In Hong Kong and London, gold rocketed up a staggering $15 and currently trades around $822 for immediate delivery.

Analysts at UBS upgraded their one-month forecast to $850. “With the two external drivers of gold, a weak dollar and strong oil, together conspiring to lift the metal higher,” said UBS analyst Robin Bhar, “we are now in range of a move to the all-time nominal high.”

But what then? “Assuming that $850 trades,” says Bahr, “a scramble for upside could see gold push higher still. But one thing is sure, once the dust settles, gold will likely correct sharply lower.” UBS’ three-month forecast for gold remains the same — $750.

In the economy, U.S. service industries grew at a faster pace in October than in the previous month says the Institute of Supply Management. The ISM’s index of nonmanufacturing businesses rose to 55.8 from 54.8 in September, defying analyst expectations of a drop to 54. Like the ISM’s other indexes, any score over 50 indicates growth within the charted industry.

Nonmanufacturing businesses now make up nearly 90% of the U.S. economy.

Beazer Homes and Hovnanian Enterprises, two of the biggest homebuilders in the nation, both revealed troubling preliminary earnings figures today.

Beazer disclosed that year-over-year home closings fell 39% in its fiscal fourth quarter. New home orders fared even worse, falling 53% over the same time period. The company announced today that it would be forced to cut 25% of its work force, about 650 jobs, and also suspend dividends for shareholders.

Hovnanian barely fared better this morning when it announced similar setbacks. The homebuilder said home sales were down 19% year over year during its fiscal fourth quarter. Net contracts fell as well, down 10%. During the same time, cancellations amounted to 40% of gross contracts… yikes.

Light sweet crude, which retreated after striking the record high of $96, is back up to $96. On the heels of an “output suspension” by Petroleos Mexicanos, Mexico’s largest oil company, most traders expect a disappointing Energy Department inventory announcement tomorrow. The general assumption is that without Mexico’s help, the U.S. will struggle to maintain inventories.

Last week, the inventory report shot crude futures up $4 per barrel. Look for tomorrow’s report to do the same.

And we’ve got a new fuel topping the “all-time” list. Diesel fuel prices hit an all-time high this morning. With a national average price of $3.30 per gallon, diesel has never been so expensive — even adjusted for inflation.

Prices for both unleaded and diesel each rose about 14 cents last week alone. Unleaded prices, at an average of $3.01, are about 20 cents short of their own all-time high. In October, prices rose an average 25 cents per gallon across the nation.

Rising fuel prices have finally caught up with the airline industry. American Airlines has announced a $20 fare increase on all U.S. round-trip flights. The airline cited rising oil prices as the sole driver behind the hike.

AA’s hike comes on the heels of almost every major airline hiking prices in October. Continental, Delta, Northwest, US Air, United, AirTran and Alaska Air have all hiked prices by a similar margin.

And who can blame them… American Airlines recently told the LA Times that a 1 cent/gallon increase in the price of jet fuel adds $30 million to its annual expenses. Officials at American also guessed that the rise in crude oil prices since “the summer” will cost the company more than $1 billion.

Last week, the Air Transport Association estimated higher fuel prices drove second-quarter costs up 5.6%… double the expense that airlines suffered the same time last year.

We’re putting the finishing touches on a new investment service we’re calling Energy & Scarcity Investor. In it, you’ll find investments that are most likely to soar in this age of rapidly increasing energy demand… and dwindling resource supply. Your first shot at the service comes this week: Friday. Look for it.

Presidential candidate Ron Paul raised an impressive $4.2 million yesterday, the biggest single-day funding for a Republican candidate ever.

Funding for Paul was almost entirely derived from this site, which we mentioned to you yesterday. Paul supporters wished to commemorate Guy Fawkes Day by boosting the Ron Paul revolution with a massive funding drive.

Only Hillary Clinton and Barack Obama have ever amassed more campaign funding in a 24-hour period.

And we couldn’t resist adding this nugget… one of Paul’s biggest supporters is professional wrestler Sean Morley. By day, Morley plays the character of a porn star turned WWE wrestler named Val Venis.

Val executing his signature finishing move… “the money shot”

But by night, Morley is, well, a big fiscal nerd not unlike your editors. He pens a blog called The Freetarian, where he giddily endorsees Ron Paul, maintains a national debt clock and records liberty-focused podcasts.

“Back when ‘Japan Inc.’ was on the rise,” a reader reminisces in light of our coverage of the rapidly ascending Chinese economy, “a friend of mine was the manager of a foreign company’s office in Asia. Being a single young fellow, he was a regular frequenter of the local clubs. One evening while enjoying the company of a bevy of young ladies, he excused himself momentarily. On his return, the ladies were all gone. Later, when the manageress passed by he asked her what had become of the girls. She replied, ‘While you were away, some Japanese came in and, well, the girls know you white guys don’t have any money.’ Now there’s a rude awakening.

“Sadly, I fear a new generation of Americans will now feel that sting. Riding high today, shot down tomorrow.”

Regards,

Addison Wiggin
The 5 Min. Forecast

ADDITIONAL RESOURCES
Ron Paul Raises More Than $4.2 Million
The Freetarian
Citigroup: $138 billion in Level 3 Assets
American Airlines leads airfare hike