by Addison Wiggin & Ian Mathias

• Buffett’s sudden “all-in wager” on the U.S. economy… Chris Mayer on why to expect more M&A soon
• Stock market fixated on the FOMC… Rob Parenteau explains the Fed’s interest rate conundrum
• The free market lives! Ford announces profit, government forecasts taxpayer loss on GM and Chrysler
• Plus, is financial innovation now taboo? Readers, The 5 weigh in

  Wow, here’s some mud in the bear market’s eye: Warren Buffett just made the biggest acquisition in Berkshire Hathaway history. In his words, “an all-in wager on the economic future of the U.S.”

Buffett’s trump card: Railroads

Undeterred by the moonshot rise in the S&P over the last eight months and the inevitable coming correction, Berkshire Hathaway announced its acquisition of Burlington Northern Santa Fe this morning. In spite of already owning a multibillion-dollar chunk of the railroad company, Buffett will have to pitch in $26 billion and take on $10 billion of Burlington debt to seal the deal. With a total value of $44 billion, it’ll be the biggest buy in Berkshire history. It’s so big that Berkshire can’t pay all cash. 40% of the deal will be financed with shares of BRK. (Berkshire’s B shares will subsequently be split 50-1… soon to truly be Everyman’s access to BRK.)

  “Too many companies sitting around with too much cash and not enough opportunities means we’ll see more deals,” Chris Mayer adds. It’s worth mentioning Chris wrote the following note to his Special Situations subscribers yesterday before Buffett’s announcement:

“The 500 largest U.S. companies -- excluding financial firms -- hold the largest cash hoard as a percentage of assets since 1960. The Wall Street Journal claims that cash hoard was nearly $1 trillion in the second quarter, or about 10% of total assets. So far in the third quarter -- with 248 of the 500 firms reporting -- cash has increased to 11.1% of assets.

“Cash is the financial equivalent of a big, soft pillow. It helps you sleep better at night. After the credit crisis turned small balance sheet leaks into lethal holes, executive suites around the country seem determined not let that happen again…

“But there might be another reason why the bigwigs sit on all that cash. They might just not see many good opportunities to invest in right now. In other words, the piling up of cash in America’s corporate treasuries may just mirror the weak economy.

“However, the market is not a kind or patient place. It doesn’t feel fear for long. The market thrives on risk taking. And there is always someone looking to relieve you of your cash. If you can’t think of something worthwhile to do with it, someone else will.

“In the market, the way to relieve one of cash is often through the ‘rough-hewn evolutionary mechanism’ -- in the words of the late financier Bruce Wasserstein -- of mergers and acquisitions. A takeover solves two problems for an acquirer: What to do with all this cash and how to grow when there don’t seem to be many opportunities to do so.

“I expect we’ll see many more such deals. In our own portfolio, I see several stocks ripe for takeover.”

If you haven’t heard, right now you can get full access to that portfolio, four of Chris’ favorite natural gas plays and a month of Mayer’s Special Situations -- all for just $1. That’s as sweet a deal as we can make… get it here while it’s still around.

  Berkshire Hathaway cut its stake in Moody’s for the third time in three months, a regulatory filing revealed yesterday. While Buffett has never had the stones to admit Moody’s and other major credit raters are a crooked bunch, he’s letting his money do the talking… Berkshire has cut its holdings of Moody’s by over 20% this year.

  Buffett may have saved the U.S. stock market from an ugly sell-off today. After finishing a choppy session yesterday, the S&P rose 0.8%. The index looked ready to give it all back early this morning, but thanks to Buffett’s news, shares are just a bit lower as we write.

  Don’t expect too much market action until tomorrow afternoon, when the FOMC emerges from its latest meeting. Especially in light of another rate hike from the Reserve Bank of Australia overnight, the market wants to know when the Fed plans on abandoning its near-zero interest rate policy.

  “We believe there will be no change in the language,” notes our macro-man Rob Parenteau, “regarding holding the fed funds rate near zero for an “extended period” at the next Federal Open Market Committee (FOMC) meeting, despite the real GDP advance in Q3. The Fed needs home prices to stabilize (if not advance) if further damage to household and bank balance sheets is to be contained.

“We suspect the end of Treasury purchases last week under the Fed’s quantitative easing regime is more important than guessing the precise language of the next FOMC statement, although the auctions during the week, we understand, went smoothly. Still, unless the relapse news builds, or the banks step up their purchases of longer-dated Treasury debt, the Treasury market has just lost a major buyer, as this part of the Fed’s quantitative easing operations has come to a close.”

  Pending home sales rose in September for the eighth month in a row, the National Association of Realtors said today. The NAR’s index of pending sales is now at 110, up 21% from September 2008. By their own admission, the NAR attributes the rise to “a rush of first-time buyers trying to beat the expiration of the tax credit at the end of this month.” Could be interesting if their lobbyists can’t pull off an extension.

  Nine banks with 153 offices and almost $20 billion in assets failed over the weekend. We apologize… we were so tied up in CIT’s failure in yesterday’s 5 we forgot to mention the unraveling of FBOP Corp. The bank holding company lost nine of its subsidiaries late Friday to the FDIC. That will cost the deposit insurance fund an estimated $2.5 billion, which we’ve heard is now almost $8 billion in the red.

That brings the tally to 115 failed banks in 2009.

  Brace yourself -- an American auto company might actually MAKE MONEY this year. Ford announced yesterday that it earned a billion dollars last quarter -- its second profitable quarter in a row and its first profitable quarter in North American sales since 2005. How? Get ready for this stunning innovation as reported by the NY Times: Ford “has turned itself around largely by cutting costs and introducing cars that consumers want to buy, rather than resorting to deep discounts to lure shoppers into showrooms.”

Of course “cash for clunkers” played an enormous role, but it’s cool to see the one American automaker not on Uncle Sam’s bailout payroll turn a profit. The free market lives on…

Heh, and naturally, the UAW cited Ford’s third-quarter profitability as the main reason why it rejected the latest round of labor concessions. Their statement said the quarterly success was “evidence of the contributions that Ford workers have made,” and thus proof that they aren’t compensated and protected adequately. Oy…

  The U.S. government is “unlikely to recover” its $80 billion investment in GM and Chrysler, the Government Accountability Office suggested in a report yesterday. The GAO’s latest report claims the two companies would need to grow to a combined market cap of $121 billion for the Treasury (read: taxpayers and Chinese) to break even. No saying how much either company is worth now, as they aren’t publicly traded… but at their peaks, their combined market value was $94 billion.

  “Edmunds' numbers appear to only take into account the $4,500 cash,” a reader writes, this one referring to the Edmunds report from last week that suggested the U.S. taxpayer paid $24,000 for each “cash for clunker” trade in.

“Administrative costs for the program? Interest on each of those $4,500 payments over how many years? Hidden costs will likely boost the ‘costs’ by a factor of three or more. Have you ever known any government program to cost less than triple their budget in the final analysis? Thus, we can guess that each of those cars sold is going to hit the taxpayers' wallets for more like $75,000 each. Can anyone say ‘Porsche’? or ‘Beemer’? or...?
 
“And we still haven't calculated the costs of all the wasted labor and materials that went into the clunkers to begin with.”

The 5: That’s all certainly possible. And what about brand loyalty? We know a whole slew of people traded in their American clunker for a Toyota or a Honda. But what about the next time they buy a car? Or when they buy one for their kids? Think about it long enough and one could make the argument that “cash for clunkers” derailed generations of auto sales for U.S. manufacturers.

  “You said, ‘Innovation in the financial markets is needed most,’” a reader writes, referring to our whining about the proposed “Financial Services Oversight Council.”

“I submit that innovation is one of the primary causes of the crises, and less, not more, innovation is needed. Banks, etc., should get back to traditional mortgages and financial products and stop trying to make money out of crap…”

  “Oh puleahse,” another reader objects. “You should know better than trot out that old harridan. We don't need banks to innovate. We need them to become tame and boring again!”

The 5: No, we think innovation is very much needed in the financial sector… just not the kind of innovation we’ve become accustomed to. At the risk of sounding cheesy, our partners at EverBank and their MarketSafe CDs are a good example. Who’d have thought 10 years ago that an average person with a few thousand bucks could gain exposure to precious metals or multiple foreign currencies without jeopardizing their principal investment? That’s pretty cool. This editor has a checking account with ING that is entirely electronic -- if you need a check from me, I can just go on any computer or smartphone and have the bank mail it to you on my behalf or deposit it directly into your account.

What about ATMs? ETFs? Cheap online brokerages? PayPal? Mutual funds? Live tickers and the proliferation of investing information? Options? Debit cards? We’d rather take our chances with financial innovation… and keep a close eye on the innovators.

"It's amazing to me,” Addison Wiggin chimes in, “how quick people are to abandon the free market when the s*^t hits the fan. Not Free Market in the political bandwagon sense pushed by the neocons, but the actual free market that produces higher and higher standards of living over time.”

Cheers,

Ian Mathias
The 5 Min. Forecast

P.S. Right as we were about to publish, gold hit a record $1,080 an ounce. Rest assured we’ll have the full report tomorrow once the dust as settled. Stay tuned.

P.P.S. If you’re trading currencies or looking to start, you can’t miss this: Our currency trader Bill Jenkins’ Seven Master Forex Secrets.

by Addison Wiggin & Ian Mathias

• Another one bites the dust: CIT marks fifth biggest bankruptcy, first taxpayer TARP loss
• So who’s next? One bank drawing major ire from all corners
• Addison Wiggin with a Fool's look at “too big to fail” legislation…and a candid admission from one man behind it
• Rob Parenteau identifies what will REALLY mark the recession’s end… and why we haven’t seen it yet
• Plus, Chris Mayer on when to sell your gold

  Hopefully, you won a bet this weekend. Maybe you cashed in on winning stock or picked up a little overtime pay… something to make up for the $2.3 billion that was just lost on our behalf.

As we forecast, CIT Group has kicked the bucket. The mega-lender filed for bankruptcy on Sunday after an unsuccessful attempt to sway their belabored bondholders. When the dust settles, this will be the fifth largest bankruptcy in U.S. history, a $71 billion mess rivaled only by Lehman, WaMu, WorldCom and GM.

But perhaps more importantly, CIT Group will mark the first official, irreversible taxpayer loss for the TARP program. The Treasury gave them $2.3 billion late last year in exchange for shares of CIT… which are now and forever worthless.

  The CIT failure won’t cause a Lehman-style stock collapse, market makers confirmed this morning. It’ll be one of those organized, prepackaged sorts of bankruptcies, we hear. And since the S&P shot up 1.5% this morning, traders don’t seem worried about the imminent absence of this big player in small business lending. (Much of the stock market rise this morning is a “buy the dip” after Friday’s big sell-off, plus some surprises from global manufacturers… more on that in a minute.)

  So what’s the next big bank to fail? We’re picking up a lot of ire (even more than usual) directed at GMAC lately. Not only is the financial arm of GM begging for its THIRD government bailout, but it just got a well-deserved FDIC smackdown over the weekend. The heat is on Ally Bank -- GMAC’s rebranded consumer bank, famous for its honest-to-God commercials and hilariously fraudulent ads like this:

Heh, more like “we make money because of you”… the U.S. taxpayer owns 35% of GMAC.

Anyway, the FDIC put the kibosh on Ally Bank’s excpetionally high interest rates and recently risky auto loan practices… both big life preservers for GMAC.

  Speaking of failing banks, we were sifting through the proposed “too big to fail” legislation that’s floating around the House and found this nugget: Under Barney Frank’s plan, the legislation would establish a “Financial Services Oversight Council.”

Essentially, it would be a group of bureaucrats who decide what companies are too big to fail and what new regulations/capital requirements they must subsequently observe. The proposed voting members:

 ·  The secretary of the Treasury, who shall serve as the chairman of the council
 ·  The chairman of the Board of Governors of the Federal Reserve System
 ·  The comptroller of the currency
 ·  The director of the Office of Thrift Supervision
 ·  The chairman of the Securities and Exchange Commission
 ·  The chairman of the Commodity Futures Trading Commission
 ·  The chairperson of the Federal Deposit Insurance Corp
 ·  The director of the Federal Housing Finance Agency
 ·  The chairman of the National Credit Union Administration.
 
In other words, all the people who never saw the crisis coming (and a few who enabled it) would sit on a council together and have to arbitrarily decide who gets to grow and who doesn’t … just when innovation in the financial markets is needed most. Brilliant.

  “Mark Warner, the junior senator from Virginia and one of the architects of the Oversight Council idea spoke to a group of financial publishers gathered at the Motley Fool in Alexandria, Va., on Friday,” writes Addison Wiggin, who was at the meeting himself. “Warner said he and his colleagues were working on the most sweeping and comprehensive reform bill since the 1930s, when the SEC itself was created.”

“The reform effort is focused on four fronts:
 
a) The council on “Too Big To Fail” (named above)
b) Increased capital requirements and strident guidelines (for speculative gambling instruments)
c) Increased funding and authority for the Resolution trust (so at least the lawyers won’t go bust)
d) and consumer protection (for those dimwits who got in over their heads in the first place).

“The parentheses, of course, are all ours.”

“The most striking thing to me,” Addison continues, “ was not that Warner was basically describing a massive land grab on regulatory authority stemming from Washington… that’s a given, especially since so much taxpayer money is being thrown down the money hole created by Wall Street.

“What was really shocking was how candid Warner was. He’s a co-founder of Nextel, so he, unlike many politicians, has a basic understanding of business and entrepreneurship. When he joined the Senate Finance Committee, he immediately rose to a position of respect and leadership within the group. He said he ‘puffed up his chest’ and was proud they all thought he ‘had a handle on all this banking stuff.’ Then he realized, without much practical experience in banking, finance or crafting legislation, he found himself leading one of the most aggressive revamps of the financial system ever attempted in history.”

“‘Well,’ Warner concluded after a quick Q&A session, ‘That’s all I have for you today. I hope we don’t screw this legislation up too badly for you.’”

Uh.

  One suggestion he made to the group of publishers: “Put your best researchers on this: When the bankruptcy laws were rewritten in ’04 and ’05, someone slipped in a provision that took counterparty risk in the CDS market outside the bankruptcy framework.

“So... in effect, when AIG was bailed out... it had to pay 100% of the obligations it had built up, rather than have those obligations negotiated in a bankruptcy court. He challenged all the publishers in the group to put our best people on it to figure out who had slipped that provision in…”

  Score one for manufacturers of the world this morning: purchasing managers indexes in the U.S., Europe and China all reported notable growth. Our ISM manufacturing index rose from 52.6 to 55.7 in October, still above the contraction score of 50 and the fastest pace of monthly growth in about three years. Europe’s PMI rose to 53.7 last month, its first month of growth since January 2008. And China’s manufacturing grew for the eighth straight month in October, its government claims.

  “Even with the third-quarter GDP advance of 3.5%, inflation-adjusted personal income, excluding government transfer payments, is still falling,” says Rob Parenteau, cutting to the heart of this crisis.

“Labor productivity is surging, and firms are starting to show the profit boosts from these efficiency gains as pricing has begun to stabilize and revive of late. Higher profit margins and higher profit levels, however, will need to feed back to higher production and employment gains for household income streams to benefit. To date, all we have is the first part, higher production, but with fewer employees.

“Part of that feedback loop will require a willingness of firms to reinvest in the United States. While purchasing managers are recording higher new orders, the actual new orders results printed by the Commerce Department are making only incremental advances.

“In other words, for the recovery to take root and build into a sustained, above-trend growth path, the profit signals now being generated by policy largesse must lead to a revival of private production and higher reinvestment rates… We will need to see companies reinvest their reviving profits into more efficient capital equipment or new technologies and products, and so far, that is occurring in only a marginal fashion, at best. That leaves too much dependent upon policy stimulus, which we know is bound to fade in 2010.”

As we mentioned Friday, if you haven’t checked out Rob in the first Richebacher Society Round Table -- it’s a must. Members can click here to listen to the whole 45 min discussion. (Not a member? Find out if the society is right for you here.)

  Today’s stock rebound has the dollar back in the dumps. The dollar index is down almost half a point today, to 76.

  That means commodities are back up. Oil has inched up just a couple cents, now at $77 a barrel. Gold, meanwhile, has registered a more notable jump. The spot price is up $25 from Friday’s low, to around $1,060 an ounce.

  “I think we’re still in the early stages of what could become a gold mania,” opines Chris Mayer. “While there are a lot more people talking about gold now and the gold price is close to all-time highs, it remains an underowned asset. Only a small fraction of investors own any gold at all. Hardly any institutions own any gold, either. As we now have 10 years of market-beating data for gold, it’s going to attract more attention.

“I think that attention will eventually carry it to a price of $2,000-3,000 pretty easily -- maybe more. So far, gold has had a steady march up since 2000. The last leg, the mania phase, always has a rapid and explosive move before it’s all over. We’re not there yet.

“As for what will pull gold back down, I think a strong economic recovery could derail gold’s story for a time, but as long as the U.S. dollar makes its way to new depths over time, I think the gold price will drift higher.

“Most people think of gold as an inflation hedge. To me, it is more than that. Gold is primarily a bet against the creditworthiness of the issuers of paper currencies. In other words, as the creditworthiness of the U.S. government weakens -- thanks to high debts and deficits -- gold will be a strong asset… and gold stocks ought to be one way to juice the return you get from gold. Our two gold stocks are up 80% and 40% since we bought them earlier this year. If we get any pullback in gold, I’ll be a buyer.”

But a buyer of what gold investment exactly? Look here for answers.

  “In Friday's 5,” a reader writes, “you stated: ‘18.8 million homes in the U.S. were officially vacant in the third quarter, the Census Bureau reports today… Thus, 2.6% of all houses in the U.S. have no occupant, three-tenths of a percent from the record high.’

“If 18.8 million homes comprise 2.6% of the total, then we have 723 million homes (18.8/0.026 = 723) in the U.S., or about 2.4 homes per person. I know we have overbuilt, but I don't think by quite that much…”

The 5: Both numbers are right, just not right together. Of the 130.3 million homes in the U.S, the official homeowner vacancy rate -- what the Census calls “the proportion of the homeowner inventory that is vacant for sale” -- is 2.6%. In the same report, which you can read here, the Census says there are 2 million empty places for sale, 4.6 million sitting empty that are for rent, another 4.6 million empty vacation homes and our favorite -- 7.6 million “other” empty homes. That’s 18.8 million, or about 14% of all homes. For some reason, Uncle Sam only uses a portion of that total for the official tally.

The real percentage is likely even higher than 14%, or 2.6%, or whatever number the government wants to use. Just here in Baltimore, there are hundreds, if not thousands, of empty homes in neighborhoods that no Census taker would ever brave. Watch The Wire for details.

At any rate, thanks for keeping us in line.

Best regards,

Ian Mathias
The 5 Min. Forecast

by Addison Wiggin & Ian Mathias

• Congressional horror show: Another unreadable trillion-dollar legislation
• Scary “cash for clunkers,” consumer spending data… Chris Mayer on the average Joe’s mighty burden
• Dan Denning on what 3.5% GDP growth really means
• Japan yells “Fire!” in crowded theater… Byron King explains, below

  Trick or treat?

Boo!

Congress has done it again… yet another unreadable, trillion-dollar piece of legislation is slithering its way through the House of Representatives. The House’s new health care reform bill, championed by Speaker Pelosi, emerged yesterday at 1,990 pages, with a CBO estimated cost of $1.05 trillion. Highlights include this spat of legalese:

“(a) Outpatient Hospitals – (1) In General – Section 1833(t)(3)(C)(iv) of the Social Security Act (42 U.S.C. 1395(t)(3)(C)(iv)) is amended – (A) in the first sentence – (i) by inserting “(which is subject to the productivity adjustment described in subclause (II) of such section)” after “1886(b)(3)(B)(iii); and (ii) by inserting “(but not below 0)” after “reduced”; and (B) in the second sentence, by inserting “and which is subject, beginning with 2010 to the productivity adjustment described in section 1886(b)(3)(B)(iii)(II).”

We’re yet to find any “wooden arrows for children”-style earmarks like those in the Emergency Economic Stabilization Act of 2008. But it’s still early in the process… plenty of time to pork it up.

We’ve got no problem with health care reform… it has to happen, if only to stave off the coming bankruptcy of our entitlement programs. But 1,990 pages? Another trillion dollars? We had a hard time forging through Atlas Shrugged -- and that was a good book, and it only cost $15.  

  Speaking of spooky government spending, here’s another: The “cash for clunkers” program ended up costing the American taxpayer $24,000 per clunker, says a report from Edmunds.com. The auto sales analysts scoured yearly sales data and concluded that of the 690,000 new cars sold during the program, only 125,000 were vehicles that would not have been sold by the end of the year. In other words, Edmunds claims that 81% of “cash for clunkers” sales were completed by customers that would have bought a new car this year anyway… they just bellied up to the proverbial bar when drinks were on Uncle Sam.

Thus, if you trust Edmunds’ numbers, the government spent $3 billion to summon 125,000 extra auto sales… or about $24,000 per car.

  "The average U.S. consumer is not in a good position to sail through this crisis,” notes Chris Mayer, “If we applied our CODE metrics to U.S. consumers, they would fail the “E” -- for excellent financial condition -- miserably. Household liabilities are still high, as this next chart shows:

“U.S. consumers need to save and rebuild their financial strength. This is why the savings rate is on the rise. This is why, for the first time since the 1950s, household credit debt declined.

“As investors, it seems clear that any idea that depends on discretionary consumer spending -- say, buying trendy new sweaters or watches or expensive shoes -- faces some big head winds…

“We will stay with companies that own needed assets and build needed things. As I like to say, we will stick with what keeps civilization a going concern. We will also avoid any stock that is dependent on regular access to the credit markets. As we saw in 2008, a mortgage crisis can shut down the credit markets. We don’t want to be held hostage by lenders in that situation, so we will stick with excellent financial conditions.”

Sounds like a plan, eh? Time is running out to take us up on our one month of Mayer’s Special Situations for $1 offer… get Chris’ favorite hard asset companies right here for just a buck.

  Consumer spending slumped 0.5% in September, the Commerce Department said today, another unintended consequence of “cash for clunkers.” That’s the first fall in five months, the biggest since December 2008 and a stark contrast to the clunker-fueled 1.4% rise in August. Real disposable income fell too, says the report. It dropped 0.1% in September, its fourth consecutive monthly decline.

  The Senate is poised to extend and expand the homebuyer tax credit. Like “cash for clunkers," the program has been christened a smashing success (costs be dammed), and word leaked this morning that the Senate could vote as early as next week to keep the credit from expiring. The current proposal will continue offering $8,000 in “free money” to first-time homebuyers, and now a new $6,500 credit for existing homeowners. Sounds like a great chance to pick up that second condo in Las Vegas, maybe with a 3.5% down FHA loan!

Whether it happens next week or not, we’d be shocked if this thing doesn’t get extended. Really, who’s on the other side of the huge lobby efforts from the realtors, homebuilders and mortgage lenders? A consortium of happy renters? A lobby representing responsible taxpayers (ha!)?

  18.8 million homes in the U.S. were officially vacant in the third quarter, the Census Bureau reports today. That’s up 400,000 from this time last year, 100,000 from second quarter and just off the all-time high -- 18.9, set in the first quarter of 2009. Thus, 2.6% of all houses in the U.S. have no occupant, three-tenths of a percent from the record high.

  The S&P 500 flew up 2.3% yesterday after the better-than-expected third-quarter GDP numbers. The Street was expecting 3.2% growth, the government delivered 3.5%… simple as that. As we write today, the market is giving back most of those gains from Thursday. Buying opportunity?

“Don't believe the GDP hype,” Dan Denning urges from his post in Melbourne. “The big problems in the economy -- too much debt, too much leverage, too much government -- are still there. They didn't go anywhere overnight. We'd suggest that getting sucked back into stocks now because of the U.S. GDP figure is a very bad idea.

“Of course, we could be wrong. Maybe stocks will go up another 20% from here. Or 30%. Or 50%. But it's not likely. It's more likely that the recession is over, but that the Depression has just begun.

“It's begun because what the U.S. GDP numbers actually show is a private sector in full retreat as its income shrinks, its assets fall in value and the cost of servicing debt rises. Into that terrible breach the public sector has stepped, armed with an arsenal of inefficient and stupid programs that give the illusion of economic activity, but actually prevent the economy from liquidating excess capacity and bad debt (the two conditions required for a real recovery).”

  Of the many possible catalysts for the next wave down, here’s a front-runner: CIT Group. The lender is on pins and needles this morning, awaiting for the outcome of a critical bondholder vote. In essence, CIT’s creditors have to either approve a restructuring plan that would wipe them out of billions in owed debt payments or take their chances in bankruptcy court. According to Bloomberg data, the latter looks more probable.

As we’ve forecast before, this super-sized small business lender is as deeply entrenched as it is fiscally screwed. Could get spicy…

  Despite the big stock rally yesterday, the dollar will end the week with a notable gain. The dollar index is up about a full point from Monday, to 76.3.

  Which is tough news for gold. It’s $30 off its record high, at $1,040 as we write. (Just as we were about to publish, Chris Mayer submitted an article titled, “When to Sell Gold.” Check us out on Monday for the details.)

  “Just this week,” reports Byron King, “word leaked that the rare earths issue is a serious concern within the highest levels of the government of Japan. According to the Financial Times, ‘A Japanese government official said... that it was “extremely important” to secure (rare earth) supplies.’

“Whoah! If you understand Japanese culture, for an official to say that something is ‘extremely important’ conveys the highest sense of urgency. For example, Japanese don't like to say the word ‘no.’ Instead, they say something is ‘very difficult.’ You're supposed to understand that ‘very difficult’ means "no," and not push the issue. So when a Japanese person says that something is ‘extremely important,’ you need to upgrade the literal words to realize that it's like shouting ‘Fire!’ in a crowded theater.

“To illustrate the issue some more, word is out that Japanese tech giant Toshiba is looking for rare earths at the source. Toshiba is clearly worried about its future supplies of rare earths. So Toshiba is trying to make a deal with the government of Kazakhstan to get access to some rare earths deposits that are mixed in with a uranium find.

“This follows another Japanese firm, Sumitomo, recently making a deal with the Kazakhs to process rare earths from leftover uranium tailings at old mine sites. And back on the home front, the Japanese government has adopted a national program to recycle even the smallest items, like cell phone batteries, to recover rare earths. The Japanese are looking in every nook and cranny for future supplies. Meanwhile, the issue is barely on the radar screen in the U.S. Rare earths? Huh? I guess it's too important for Congress to reform health care, right?”

Byron’s been hot on the rare earths beat long before it captured the mainstream’s attention. He told us at the editorial meetings this week that he is expending his coverage to what’s called “technology metals”: “Important deposits of exotic metals like tungsten, indium and some other items. It's safe to say that without these metals, the modern world just wouldn't work.”

Put Byron’s rare earth plays together with those tech metals and you get St. Barbara’s list -- a portfolio of companies in this niche, named after the patron saint of miners. Not even his high-end Energy & Scarcity Investor readers have seen the full list yet… find out how you can, here.

Happy Halloween,

Ian Mathias
The 5 Min. Forecast

P.S. Check this out: The first ever Richebacher Society Round Table discussion. After our editorial meetings this week, Addison Wiggin, Eric Fry, Chris Mayer, Rob Parenteau and Dan Amoss met for a macro debate in Dr. Richebacher’s memorial library here at our Baltimore HQ.  They discussed baby boomers, gold, the market, “going Galt,” BRIC nations, government stimulus, the dollar reserve and alternative investing. We recorded the whole show -- over 45 minutes of forecasts, insights and strategies you won’t hear anywhere else. Members of the Richebacher Society can listen now by clicking here.

Not a member? You’re really missing out… join us here.

by Addison Wiggin & Ian Mathias

• Bear market’s back! What data hurt stocks, and which one caught our attention
• Bill Gross proclaims the stock rally is “likely at its pinnacle”
• Traders fire shots over Brazil’s bow… one clue the Bovespa’s in for a rough patch
• Government claims recession is over… Rob Parenteau on what that means for the “recovery”
• Chris Mayer on the demographics of investing: Which nations have the youth to forge ahead
• Plus, signs of the times: Rap legend shows fiscal restraint, banking analyst frets his TV fame

  We take a few days off and look what happens… the bear market’s back. While we conducted our bimonthly editorial meetings over the last two days (more on that in a few minutes), the S&P 500 fell 3.4%. Here’s how:

• The S&P/Case-Shiller home price index saw nice year-over-year improvement. But as we wrote on behalf of The Daily Reckoning on Tuesday, the real “recovery” in home prices is still minimal. The average house, according to S&P, is still back at its 2003 price
• New home sales fell for the first time in five months, the Commerce Department said yesterday
• GMAC, the financial arm of GM, is in talks with the Treasury for ANOTHER taxpayer bailout. Uncle Sam has already given the company $12.5 billion in exchange for a 35% stake
• The mighty Goldman Sachs revised its third-quarter GDP projection down to 2.7%, from 3.3%. (The surprising, official results are below.)

  And here’s the bit that really gave us pause: American consumption confidence hit a new crisis low on Tuesday. The Conference Board’s headline number sank from 53 to 47. That’s not great news for the Street even at face value, as the consensus was looking for a very small improvement. But check out the fine print of this survey… scary stuff:

The Conference’s Board’s gauge of consumption attitudes is supported by two subindexes: one that gauges how people feel about the present situation and one that somehow charts our future expectations. The present index, aka the only one worth trusting (if the crowd was any good at seeing what was coming… well… we wouldn’t be in business) just hit a score of 20.7. That’s the lowest it’s been throughout this entire crisis. In fact, you’d have to go back 26 years for a score that low.

  “Asset appreciation in U.S. and other G-7 economies has been artificially elevated for years,” proclaims Bill Gross in his monthly missive. “In order to prevent prices sinking even lower than recent downtrends averaging 30% for stocks, homes, commercial real estate and certain high-yield bonds, central banks must keep policy rates historically low for an extended period of time…

“But while this may support asset prices -- including Treasury paper -- across the front end and belly of the curve, at the same time it provides little reward in terms of future income. Investors, of course, notice this inevitable conclusion by referencing Treasury bills at 0.15%, 2-year notes at less than 1% and 10-year maturities at a paltry 3.40%. Absent deflationary momentum, this is all a Treasury investor can expect…

“Broadening the concept to the U.S. bond market as a whole (mortgages plus investment-grade corporates), the total bond market yields only 3.5%. To get more than that, high-yield distressed mortgages and stocks beckon the investor increasingly beguiled by hopes of a V-shaped recovery and ‘old normal’ market standards. Not likely, and the risks outweigh the rewards at this point. Investors must recognize that if assets appreciate with nominal GDP, a 4–5% return is about all they can expect even with abnormally low policy rates.

“Rage, rage, against this conclusion if you wish, but the six-month rally in risk assets -- while still continuously supported by Fed and Treasury policymakers -- is likely at its pinnacle.”

Of course, it is convenient that a purveyor of bonds suggests future stock returns will not mimic the returns of the last six months… but he’s probably right.

  While U.S. stocks have suffered a few hits this week, Brazilian shares have taken a right cross to the nose. Here’s the blow by blow:

This is something worth watching as the bear market rally inevitably unravels. So much money has ridden the Brazil ride on the way up, and it looks as though traders won’t be afraid to jump ship on the way down. That was certainly the case with China and India during the 2008 crisis… which proved to be a stellar buying opportunity. All the more reason to check out our latest creation: BRIC by BRIC.

  “Young populations predict strong economic growth,” writes Chris Mayer, like your editor, an armchair demographist. “A young population means that most people are of working age as a percentage of total population. The emerging markets and developed markets are on the verge of trading places, as this next chart, from the fund Absolute Return, shows:

“This doesn’t mean all emerging markets have young populations. If you look at the so-called dependency ratios by country, you see that Russia and China quickly get old. In fact, their dependency ratios will surpass the U.K.’s over the next two decades. The really young populations, at least among the big emerging markets, are in India and Brazil.

“This chart, again from Absolute Return, shows you how many people are aged 65 or older for every 100 people aged 15-64. So if the ratio is 40, it means that there are 40 people aged 65 or older for every 100 people aged 15-64 (the working-age population).

“Low numbers mean lots of working people supporting the elderly. Higher numbers mean there are fewer people working to support the elderly. The theory goes that the younger populations with lower dependency issues will grow faster than those older populations.

“So looking at this chart, you can see the clear winners through 2030 in the demographic game -- India and Brazil. The U.S., perhaps surprisingly, doesn’t look so bad. Of course, the ages here are somewhat arbitrary. It seems to me that one way out of the problem is that people simply work longer. Why retire at 65?”

Chris spent some time explaining an interesting U.S.-Brazil-China nexus during yesterday’s editorial meeting. Here’s the gist: China needs food and water -- so much that it will have to import both for the indefinite future. But from where? And how does a nation bring potable water into its borders? Heh, not by containership. Stay tuned for more…

  Back in the U.S., the recession is over! That’s the ipso facto word from the Commerce Department this morning, which claims that American GDP expanded at an annual rate of 3.5% in the third quarter. That blows Wall Street estimates out of the water, including Goldman’s last-minute revision.

Interestingly, 3.5% is the precise number Rob Parenteau threw our way last week, when he forecast that this GDP surprise “will mark an official end to the severe recession. One consequence is that Treasury bond buyers may be reluctant to add to their exposures, especially with the Fed’s quantitative easing for this asset category ending in a month. The housing recovery is tentative enough that a backup in mortgage rates into year-end would undoubtedly prove problematic.”

Until then, the GDP number has put the risk trade that Bill Gross spoke of back in full force. The Dow is up over 100 points as we write.

  Though the recession might have reached its technical conclusion, people are still out of work. An additional 530,000 Americans filed for jobless claims for the first time last week, the Labor Department says today.

  Sign of the times: “The credit crunch has hit rap,” rap mogul 50 Cent told The Telegraph this week. In a surprisingly susinct obeservation, 50 said, “These are times when you learn about the value of money. I buy diamonds on a very regular basis, but now I am selling my old stuff before I get something new.”

Heh, man’s got a plan.

  50’s hard-earned dollars might buy him a few more carats today, as the dollar index has risen from its recent lows. Just as Bill Bonner predicted in these pages, a wave of fear on Wall Street restarted the flight to U.S. paper. Thus, the dollar index rose from 75.3 at the start of the week to over 76 today. That puts the euro down 3 cents from Monday, to $1.47.

  The dollar’s sudden rise has put the hurt on commodites. Oil’s down $3 since the start of the week, now at $79 a barrel. At $1,040 an ounce, gold is well off its recent high of $1,070.

  Last today, this is what’s wrong with the world:

“I’m not going to do it anymore. I’m going to have to see the numbers before I go on air,” celebrity banking analyst Dick Bove told Dow Jones yesterday. In a shocking, earth-shattering change of heart, Bove has decided to stop doing instant earnings reaction bits on CNBC and Bloomberg. This comes after he ate crow for it last week -- he said Wells Fargo earnings were “standout” on air, then in a print report later that day (after he actually read the earnings), called Wells’ numbers “pretty poor” and downgraded the stock.

What a party pooper, eh? That really ruins the game… no more of that off-the-cuff, emotionally driven reaction then zooming in on the live-to-the-nanosecond bid/ask… or overlaying his face on a WFC chart that’s moving in real-time. Now Bove’s is just going to carefully perform his job in a professional and ethical manner. BO-RING.

That’s not going to sell any commercial space, Dick.

Cheers,

Ian Mathias
The 5 Min. Forecast

P.S. There is one event we regret missing over the last two days: Our publisher launched a blitzkrieg-style sale on our microcap newsletter, Bulletin Board Elite. Luckily, there are a few hours left… so if you were waiting for a big price cut on this high-end service, this is your chance. Click here by midnight tonight for details.

by Addison Wiggin & Ian Mathias

• Chris Mayer with one chart that proves “it isn’t over yet”… and a short play to match
• Wave of weekend financial failures… Congress mulls scary-sounding “too big to fail” legislation
• Dan Amoss explores the “recovery illusion” that’s approaching tech bubble exuberance
• Plus, a “rare” reason why wind power might never serve the U.S.’ needs

  “This chart shows you it isn’t over yet,” Chris Mayer begins today. Chris, Dan Amoss and Addison Wiggin all made the trip to NYC last week to attend the annual Value Investing Congress. Here’s the bit that caught Chris’ attention, a redux of the famous Credit Suisse chart, courtesy of Whitney Tilson and Glenn Tongue of T2 Partners:

“These helped frame where we are in the mortgage crisis,” adds Chris, “which has been the main shark in the water over the past couple of years. You should know where that shark is and whether or not it is hungry…

“Clearly, it is not yet safe to get back in the water: Years 2010 and 2011 face big resets in so-called Alt-A and Option ARM loans. What this means is more write-downs and more losses for banks and others who hold these mortgages.

“The bounce in home building stocks looks ridiculous in light of what they have to look forward to. The T2 duo actually recommended shorting the home building stocks through the iShares Dow Jones U.S. Home Construction ETF (ITB)… I like the idea of shorting homebuilders. At the very least, I wouldn’t buy one.”

If you want to know what Chris would buy, you can find out today for just $1.

  A $20 billion commercial real estate operation quietly went under over the weekend. Capmark Financial filed for bankruptcy protection Sunday, a not-so-surprising turn of events for a real estate company with $20 billion in assets and $21 billion in liabilities. This will go down as a real home run investment for private equity giants Kohlberg Kravis Roberts, who bought 73% of Capmark at the height of the housing bubble for $1.5 billion in cash and $7 billion in debt. Ouch.

And most of the remaining (now worthless) stake is owned by GMAC -- the financial arm of GM. Helluva track record for them too, eh?

  Seven more banks failed last weekend, bringing the yearly sum to 106. Three in Florida and one each in Georgia, Illinois, Minnesota and Wisconsin will end up taking a $356 million bite out of the FDIC’s deposit insurance fund… which ran out of real money months ago.

  Back in Washington, Congress is getting ready for the next crisis… in their own strange way: The House Financial Services Committee might introduce new “too big to fail” legislation as soon as this week. Led by our “favorite” representative Barney Frank, rumor has it that the new regulations would, in the words of the N.Y. Times, “make it easier for the government to seize control of troubled financial institutions, throw out management, wipe out the shareholders and change the terms of existing loans held by the institution.”

So rather than proposing legislation that might keep banks from becoming TBTF, Congress aims to make it easier to nationalize them upon their demise? We’ve even heard this rumored legislation explained as a “living will” for banks… scary.

  “We should be phasing out the government guarantees of the banking system’s liabilities,” says Dan Amoss, armed with a viable alternative. “That, I assure you, would discourage foolish risk-taking among bankers. Case in point: Goldman Sachs behaved in a much more responsible, sustainable manner when it was a privately owned partnership without government guarantees, rather than the high-frequency trading, TLGP-hogging, heavily lobbying institution that it is today.

“Like an addictive drug, today’s fiscal and monetary policies have made everyone feel better, but have further weakened the structural health and sustainability of the economy. If you doubt this, just look at the horror in most investors’ eyes when they are confronted with the prospect of a fed funds rate above, say, 2% -- up from today’s range of zero percent. The addiction to E-Z credit and government support everywhere you look is one of the clearest reasons that this economic recovery is an elaborate illusion.

“Yet we still see examples of extreme inefficiencies in the valuation of certain stocks. It feels eerily similar to the tech bubble, with investors behaving as if today is the last chance they’ll ever get to buy Amazon.com stock at less than 80 times earnings. Whether it’s the sky-high multiple on Amazon’s maturing business, which seems to be discounting that every Chinese citizen will own a Kindle within five years, or the expectation that banks employing creative accounting have seen the worst of their credit losses, many investors are putting real money behind their belief in a super-bullish economic environment.”

  The stock market is still in stall mode. Despite all the big swings, the S&P declined 0.7% for all of last week.

  The dollar index is at 75.3 today, just off its yearly low, thanks mostly to this:

  “China should reduce the proportion of dollars and increase the proportion of the euro and yen,” Zhou Hai, a People’s Bank of China bigwig wrote in a state-sponsored newspaper early this morning. This is nothing new coming from prominent Chinese bankers… heh, but every time the FX community hears China preping to dump the dollar, the trading screens flicker to life. The euro rose to a 14-month high of $1.50. The yen is at 92, about 5 points from its strongest level this year.

  The beaten-down dollar is helping gold maintain its recent rise. The spot price is at $1,055 as we write, about $15 off gold’s record high.

The same way tempered enthusiasim is dragging down stocks, the recent oil rally is fading a bit today. After reaching as high as $82 a barrel late last week, crude is back to $79 today.

  Have you noticed rising gas prices lately? The national average price at the pump shot up almost 18 cents a gallon over the last two weeks, today’s survey from Trilby Lundberg claims. The typical cheap stuff now goes for $2.66.

  “There was quite a meeting in Washington, D.C., this week,” our resource man Byron King rounds off today’s forecast. “Some of the key players in government and the metals industry came together in the same room to discuss the looming shortages of critical elements that are coming down the road…

“Some so-called "technologies of the future" are destined to fail due to lack of critical metals with which to effect buildout. Take the rare earth, neodymium, for example. It's a component of strong permanent magnets -- which are made out of a mixture of neodymium, iron and boron.

“Strong permanent magnets are critical to gaining efficiency in rotating power-generation units like, say, windmills. Y'know... we're going to replace burning fossil fuels with windmills, right? Isn't that the idea? We're going to live in the United States of Windmills, right?

“Except one fact of physics is that without strong permanent magnets, you can't generate nearly as much power with each turn of the large blades. So neodymium -- in the magnets -- is critical to our windmill future. There's NO substitute for neodymium, and believe me, people have tried to figure a way around it.

“But with neodymium, as with a host of other relatively obscure substances from the periodic table, the global supply is precarious. In some cases, the supply chain is at great risk because there are but a few sources. For some of those sources, we see things like a major mine playing out due to depletion (Baotou, China, for rare earths) or shut down due to environmental issues (Mountain Pass, Calif., again for rare earths). With other metals, many mines are effectively off-limits due to political problems (in the Congo, for instance).”

If you haven’t checked it out yet, Byron wrote an investment report on this meeting last week – including one “post strategic summit” play that could rise over 600% by this time next year. Read it for yourself right here.

“I'll start by saying I paid cash for my home, a nice luxurious place,” a reader writes. “I don't carry debt on anything and never really have.
 
“I fully support and encourage the walk-away home-‘owners.’ Both buyers and banks speculate on the ‘value’ of a property in a mortgage and it's perfectly legal and moral for the ‘buyers’ to stop paying, which is why the contract details what happens next and why there's collateral in the first place.
 
“My gripe is with the idiots that bid up property ‘values’ (including mine, which only costs me more in taxes for nothing) and the government that backstops them and gives freebies and incentives to only some buyers, at my expense. If any good can come to me from all this, it is that prices go down where they belong, much lower, and I thank all walk-aways for helping that along.”

  “I see credit rating agency Moody’s Investors Service has placed Bank of Montreal’s debt rating on review for a downgrade," a reader wrote on our blog late last week. (And by "wrote," we mean 95% copy/pasted from a Globe and Mail bit... shame on you.)

“The recent period of financial and economic stress has revealed weaknesses in the bank’s U.S. business, Moody’s said. BMO’s U.S. operations have had two consecutive years of losses, and in all likelihood 2009 will mark the third, it said…”

“Can we look forward to a comment from Dan in The 5 tomorrow?”

The 5: Dan did write his Strategic Short Report readers on Friday. Since his airing of BMO’s dirty laundry has become a bit of a public affair, we’re happy to share a portion of his comments today:
 
“Moody’s says that the review will focus on the following four factors:

· The potential for continuing volatility in BMO’s capital markets business
· The time frame for Harris Financial’s return to profitability on a consistent basis
· The prospect for continuing credit losses in Canada and the United States, and
· BMO’s prospective risk-adjusted profitability before and after loan loss provisions and taxes.

“These four factors are reason to be skeptical of BMO’s long-term earnings power. I expect that BMO’s cumulative credit losses through the rest of this cycle will surprise the complacent shareholders of BMO, who appear to believe that we’re past the peak. I’m evaluating BMO for another set of longer-dated put options, but for now, hold your December BMO puts. Do not add to them.”

Best,

Ian Mathias
The 5 Min. Forecast

P.S. An apology in advance: You won’t be getting your daily 5 Min. Forecast again until Thursday. All of Agora Financial’s editors and writers are meeting at our Baltimore HQ this week for our bimonthly editorial meeting. We’ll brainstorm. We’ll analyze. We’ll debate. We’ll eat the best BBQ in town. That’s a recipe for an enjoyable few days for this editor and -- God willing -- some great new investment and economic ideas for your digestion as well. We’ll be in touch on Thursday for the choice bits from our marathon meetings.

P.P.S. If you get FOX Business News, tune in today just after 3 p.m. EST. Our resource trader Alan Knuckman will be sharing his thoughts. But if you seek his advice – the kind that just brought his readers 106% profits trading crude oil – look here.

by Addison Wiggin & Ian Mathias

• Gold buyers gain a powerful ally… his $95 billion “financial insurance” plan
• Eric Sprott says buy miners, not bullion… one unusual chart agrees
• Jim Nelson reveals a stealth tax on your income investments
• Plus, readers write in on GDP’s uselessness, Vitamin D’s utility… our retorts, below

If you’ve invested in gold, you’re about to gain a powerful ally: pension funds.

“I think the largest institutions like our own are realizing that we barely own any [gold]” Shayne McGuire, head of the Teacher Retirement System of Texas said in an interview in Hong Kong very early this morning. “The same thing applies to most of the pension funds which manage trillions of dollars in world wealth.”

McGuire, who oversees $95 billion, just opened an internally managed gold fund for his 1.3 million public education employees, and suggests other pension funds follow suit. Owning gold is “financial insurance,” he said, sounding a lot like David Einhorn at the Value Investing Congress earlier this week. “Consider the tremendous fiscal excess that major governments have made to prevent the world economy from collapsing… I don’t think the question really is what is gold worth but what are currencies not worth.”

According to the FT, there are 2,600 public pension plans in the U.S., worth over $2 trillion.

 “If we believe we’re in a secular bear market or entering a world of hyper-inflation and debased fiat currencies,” Eric Sprott, fund chief at Sprott Hedge Fund LP, added. “There’s no better place to be than gold and precious metals. I find it quite instructive that the price of gold has gone up every year for the past nine years, since the bear market started. That’s not a coincidence, and we think the full cycle could easily reach 15-20 years.

“There is a survivalist aspect to having such a big stake in tangible assets. As long as governments show such low regard for policies that support the real value of paper financial assets, investing in precious metals is about the only way to guarantee the preservation of your wealth.”

“Sprott is our kind of guy,” notes Addison Wiggin, fresh back from the Congress himself. “His $4.2 billion hedge fund is long 30% in silver bullion, 15% in gold bullion, 30% in gold stocks, 10% in energy, 5% in miscellaneous stocks and 10% in cash. Suspicious of equities going back to the tech bust, Sprott played what we had termed ‘The Trade of the Decade’ like an impresario…”

Now, after nearly 10 years, “bargains are harder to find today,” Sprott continued, “but we’re still finding small gold miners that appear to have slipped through the market’s cracks and trade -- based on what we believe are reasonable production estimates and no increase in the price of gold -- at only around five times estimated 2011 earnings. When we find those, we’ll buy them all day long.”

Gold has risen back up to $1,065 this morning, just a few bucks shy of last week’s all-time high.

Addison, by the way, echoed many of these lead themes during an interview with a CNN radio affiliate in Ontario yesterday. Give a listen, here.

One more word on gold miners: If you’re a true gold believer, what’s the point in measuring the price of your gold mining stocks in dollars? Check out this funky ratio:

In other words, this is how many ounces of gold it would take to pick up one share of HUI over the last three years. When the credit crisis hit its peak in late 2008, miners were very cheap. You could get a share of HUI for less than a quarter an ounce of gold. Today, looks like the big money has been made… but there’s still lots of value left compared with the pre-crisis norm.

And even if you insist on measuring these miners in dollars, the HUI is still 14% below its all-time high.

“Most commodities are still well below their peaks,” noted Chris Mayer and Alan Knuckman in a recent MarketWatch article. “The ag commodities are especially cheap… We've got all kinds of constraints on producing much more -- falling acreage of arable land, desertification, water issues, slowing crop yield improvement, drought, growing populations and shifting diets toward more grain-intensive foods.”

The U.S. dollar remains at near yearly lows today. The dollar index is at 75.3, just a few tenths of a point above Wednesday’s 52-week low of 74.9.

Oil is giving up its yearly high of $81 a barrel as we write. There’s the profit taking, to be expected, plus this:

The U.S. stock market looks like its going to erase yesterday’s 1.1% rally. There were big earnings surprises from Amazon and Microsoft today, plus a way-bigger-than-expected rise in existing home sales (more on that in a minute). But the market just isn’t having it… as we write, most of yesterday’s gains are gone. For the whole week, the Dow and S&P are around break-even.

“Watch for foreign nations taxing your dividend income,” warns our income investor Jim Nelson.

“Take Canada, for instance. They have historically presented us with amazing dividend yield opportunities. The country’s vast resources offer plenty of investment potential. Large trusts have been set up to collect royalties as these resources are mined and drilled, and in turn they send them out to shareholders in dividends.

“Unfortunately, Canada changed its tax law recently. Now instead of just collecting a straight dividend check, we are charged 15% before we ever see the money. The government of Canada wanted a piece of that lucrative pie. Of course, if the yield is large enough, we should still consider it. Other countries like Switzerland charge even more, upward of a 35% dividend tax.

“So which nations have no dividend withholding tax? Brazil tops the list. Rio’s newfound spotlight could help bring more focus to this great dividend-paying nation. We are constantly looking there for more opportunities.

“The U.K. is also a notable safe haven. While we aren’t necessarily bullish on the British pound, we do enjoy the tax break on many of our holdings in the Lifetime Income Report portfolio. Some other places with a 0% withholding tax we should note include Hong Kong, India and Mexico. We’ve been scouring these markets to find some income payers for you.”

Curious to see what he’s found? Check out Jim’s Lifetime Income Report right here.

Existing home sales in the U.S. registered a surprise 9.4% jump in September, the National Association of Realtors said today. This quote from NAR chief economist Lawrence Yun says it all: “Much of the momentum is from people responding to the first-time buyer tax credit, which is freeing many sellers to make a trade and buy another home. We are hopeful the tax credit will be extended and possibly expanded to more buyers, at least through the middle of next year, because the rising sales momentum needs to continue for a few additional quarters until we reach a point of a self-sustaining recovery.”

Last today, the U.K. economy just entered a whole new level of nasty. GDP fell 0.4% there in the third quarter, the Office for National Stats said this morning. Not a single economist polled by Bloomberg expected economic contraction. The consensus was anticipating 0.2% growth. (Heh, NO WAY that could happen here, right?)

That means the U.K. economy has shrunk for six quarters in a row, the longest streak since records began in 1955.

“You guys keep quoting and using U.S. and Chinese GDP figures,” a reader writes, “as if that term/concept actually meant anything. It ranks as one of the most useless of all ‘indicators’ ever created, right along with CPI.”

The 5: We think Rob Parenteau’s bit in yesterday’s 5 is an example to the contrary. To paraphrase his observation, if third-quarter U.S. GDP prints higher than expected, it’ll put more pressure on the Fed to unwind its many monetary interventions, like buying less Fannie and Freddie paper and raising interest rates. That would almost immediately affect the value of your home and your ability to refinance or purchase a new one.

While the GDP numbers are surely massaged and count things such as government spending as economic growth (heh), they do have an impact on the psychology of the market. We’re as skeptical as the next lot, but still try to wade through the crud to get to something useful. You’re free to do as you like with our observations.

“Hypervitaminosis D is uncommon,” a physician reader writes, responding to our quick coverage of vitamin D this week. “Vitamin D itself is not toxic, but that does not mean it is safe in unlimited quantities. Excess vitamin D by itself or in combination with other medications (such as diuretics), calcium supplements and undiagnosed kidney problems can lead to a buildup of calcium in your blood (hypercalcemia), causing symptoms such as:

· Nausea
· Vomiting
· Poor appetite
· Constipation
· Weakness
· Confusion
· Heart rhythm abnormalities
· Kidney stones.

“The current minimum RDA of 400u for adults and 800u for seniors is probably too low; 1,000-2,000u is probably more ideal, but I would not recommend anyone taking over 2,000u a day without checking a blood calcium level. As a healthy physician in my 50s, I take 1,000u a day. I make sure that this is D3, labeled as such on the bottle.”

In response to the reader that stated of Vitamin D, “There is no toxicity, so high doses can be taken,” another reader writes, “this is opinion and not fact. Folks need to be careful what they write, and print, without factual support. Vitamin D overdosing is controversial at this time.”

The 5: We have to admit we’re out of our comfort zone here. But the point Patrick made still rings true: Research he trusts shows that most of us don’t get enough of the stuff… upping your dosage can lead to a variety of health benefits.

Beyond that, talk to your doctor. And consider checking out of our associates at the Health Sciences Institute. But if you are looking for ways to profit from this trend -- and other scientific breakthroughs that could significantly lengthen and improve your life -- take a look at Patrick’s work in Breakthrough Technology Alert.

Have a nice weekend,

Ian Mathias
The 5 Min. Forecast

P.S. Do you have one dollar to spare? That’ll buy you four of Chris Mayer’s favorite natural gas plays. Seriously… just a dollar… no strings attached. Details here.  

by Addison Wiggin & Ian Mathias

• Unintended consequences: How a the faux-recovery will hurt the housing market
• Dan Amoss highlights a “priced to perfection” sector with a less-than-perfect outlook
• How China helped oil up to new 2009 high
• Bill Jenkins says enough is enough… his bet on a stronger dollar, below

  Follow this one… how the recent rise in retail sales might bust the housing “recovery”:

“Retail sales growth is understandably proving meager and hard to regenerate,” writes our macro sage Rob Parenteau, “in a nation where private debt deleveraging is under way and net job generation has yet to return. The early read on consumer expectations for October shows a seven-point drop, which is very indicative of the hesitancy that we suspect will characterize the tentative return to higher spending by U.S. households. Too many rugs have been ripped out from underneath them over the past two years.

 “The shallow recovery in the dollar level of retail sales is, nevertheless, enough to help produce a positive GDP result for Q3, with consensus estimates centering on 3.5% of late. As this will mark an official end to the severe recession, one consequence is that Treasury bond buyers may be reluctant to add to their exposures, especially with the Fed’s quantitative easing for this asset category ending in a month. The housing recovery is tentative enough that a backup in mortgage rates into year-end would undoubtedly prove problematic.”

(What would that mean for markets? Look here for Rob’s prediction.)

  Right on cue, mortgage rates have abruptly spiked. The average 30-year fixed, which fell all summer, has popped from 4.8% at the start of October to 5.2% today.

These rates (and the yield on 10-year treasuries) have risen lately, thanks mostly to the Fed, whose mortgage market manipulations, as Rob Parenteau noted, are on track to wind down soon. More on that in a minute…

  And thus, as rates rise, mortgage applications fell 13% last week. The Mortgage Bankers Association said yesterday that weekly refis fell almost 17%, while applications for new mortgages declined 7%.

  So put it all together… withdrawing government intervention, rising rates and falling applications… and you get this: From June 2009-June 2010, the median U.S. home price will fall another 11.3%. According to research published this week from Fiserv, home values will likely drop next year by about as much as they did this year… ouch.

The firm expects 342 out of 381 markets to record losses, with Florida, California, Nevada and Arizona leading the way (again). Value investors should check out some screamin’ deals in Detroit: Already home of the lowest median home price in the U.S. ($50,000 -- not a typo), prices in Detroit are expected to fall another 9%. If you’re looking to weather the storm, check out Kennewick, Wash., the biggest winner of the survey, where prices are expected to rise almost 9% next year.

  “The upcoming third-quarter earnings reports from real estate investment trusts will not be pretty,” writes Dan Amoss, whose Strategic Short Report readers are currently betting against the REIT rebound. “Second-quarter earnings for the sector were boosted by one-time gains from buying back publicly traded bonds at discounts, and taking advantage of bond investors’ newly whimsical attitude toward credit risk by floating new bond issues. Earnings were also boosted as REIT executives slashed property operating and maintenance expenses. But that can only go so far before real estate quality becomes an issue. The competitive environment to fill vacant space will squeeze REIT profits. If you’re a high-quality tenant, it will be a ‘buyers’ market’ for years.

“Sell-side analysts have adjusted their earnings estimates for REITs upward, and the bar is now higher. But same store net operating income (i.e., trends in rent pricing) is what really matters for investors’ expectations looking out several years. As rents remain depressed from tepid new business formation and slow retail sales, the supply of credit to REITs will once again tighten, which will dampen REIT owners’ expectations for future free cash flow.

“The Dow Jones U.S. Real Estate Index has tacked on a hefty 30% rally since second-quarter earnings season in July. REITs are now priced for perfection, rather than being priced for the obvious multiyear depression staring REIT owners in the face.”

  Better-than-expected earnings are no longer moving the market higher by the day. Despite some beats from big names like Morgan Stanley and Yahoo, the S&P 500 finished down almost 1% yesterday. Fear appears to be coming back en vogue… most of the sell-off came in the last hour of trading yesterday, triggered by famed analyst Dick Bove’s downgrade of Wells Fargo.

Looks like much of the same today… despite earnings beats from 3M, Dow, Travelers, McDonald’s and AT&T, the DJIA and S&P both opened down.

  To make matters worse, initial claims for jobless benefits rose by 11,000, to 531,000, last week. Claims had fallen five of the last six weeks… no more. On the bright side, continuing claims fell below 6 million for the first time since March.

  Traders take note: An interest rate hike “is not something I anticipate happening over the next several months. Certainly not,” said Fed governor Janet Yellen yesterday, who is a voting member of the FOMC.

  On the other side of the world, Chinese GDP grew 8.9% annually during the third quarter, its government claims today. That’s a full one percentage point improvement from the second quarter, and maintains China’s eerily perfect projections of 8-9% growth in 2009.

  Thus, oil found another 2009 high early this morning. Light sweet crude rose as high as $82 a barrel. China might get the credit for the new high, but this isn’t helping:

  The dollar hit another 12-month low yesterday and is barely higher as we write. The dollar index sank below 75 for the first time in a year yesterday afternoon, and now it’s just a tiny bit higher, at 75.3. That puts the euro up a penny, to $1.50. The real stars are commodity currencies like the Canadian and Australian dollars. Both are soaring back toward parity with the greenback, with the loonie at 95 cents and the Aussie at 92 cents.

  “I am looking for a bounce in the dollar,” says our currency trader Bill Jenkins. “I thought that perhaps the fall season might be enough to bring it on. That hasn’t happened. That’s not the same as saying it isn’t in the cards. We are now in the midst of the new equities earnings season. J.P. Morgan produced stellar figures that pumped risk appetite into the market strong and hard. Other corporations may not be able to do as well.

“It seems to me that this rally is already on thin ice… the reasons why we have delineated here on many occasions. At any rate, the dollar will bounce, it will likely end up being a bigger move than most anticipate and it will be fueled by fear and short covering. Then, when the big boys have had enough, the course will be reversed, fundamentals will resume their place, and the dollar will begin its drift toward the nether regions once again.

“It is a treacherous pathway before us, but should yield us some really nice profits.”

For Bill’s precise strategies on reaping those FX profits, look here.

  Gold has been bouncing between $1,050 and $1,065 all week. As we write, an ounce goes for $1,055.

  Last, as you’ve likely heard, the Obama administration is going to slash executive pay at the seven biggest bailed-out companies. No official word yet on what the “pay czar” (really, what a horrible choice of monikers) Ken Feinberg will do, but the rumor is an average 50% cut for the 25 highest-paid execs at Citi, Bank of America, AIG, Chrysler, Chrysler Financial, GM and GMAC. (VP number 26 must be pretty psyched, eh?)

Of course, we’re a little miffed to see Uncle Sam telling any private business what it can or cannot pay its employees, if it’s even fair to call the companies “private” anymore. Then again, we were quite content watching all seven of these lousy companies fail, and it seems like this administration is doing all that it can to ensure that happens… just in a more excruciatingly bureaucratic way.

And we wonder… what will those companies do with that money now that they can’t pay themselves so richly? Heh, we can’t see them cutting checks to the March of Dimes.

   “You asked why no one blamed the banks,” a reader writes of the strange shadow inventory of unforeclosed homes. “I think the answer is that the bank error happened a long time ago, when they made the original loan. Their situation now is to make the best of a bad situation. They, apparently, think that controlled feeding of foreclosures to the market will help to receive a higher return. They may be right, but we probably won't know for a long time, if ever.

“I would be much more interested to know what will happen after the bank forecloses. What should happen is the couple in question should be prosecuted for fraud. If the relative actually buys a new home for them using the 'stash,' they're equally guilty. In addition, if the money is given to them in lump sum just before the closing, the bank for the new loan, if any, shouldn't allow it. If the money is being put into an account under the relative's name, it will certainly exceed the allowable deduction for an annual gift. Therefore, a gift tax will have to be paid or at least deducted from their lifetime exclusion. The same thing applies when the house is given to the 'real' purchasers.

“Last, but certainly not least, after waiting for the new house to be retitled to the original mortgagees, the bank should file a civil suit to recover the back payments and any losses on the original mortgage. Hopefully, the bank will get the new house, if the fraud (and IRS) penalties didn't get it already.

  “Thanks for printing the small bit about vitamin D,” another reader writes, “and all the insight you put into this crazy world. For the past two years now, I've been taking vitamin D3 and have noticed a remarkable difference in shedding colds and on coming flus. There is no toxicity, so high doses can be taken. There is a mountain of information about this greatly misunderstood vitamin. Our health is the only real wealth one has.”

Cheers to that,

Ian Mathias
The 5 Min. Forecast

P.S. This is the last chance to claim your 24 free options trades. At midnight tonight, the deal’s off. Click here to learn more, before this rare offer expires.

by Addison Wiggin & Ian Mathias

• One year later, are we better off for bailing out banks? Two charts reveal the answer
• Bill Bonner on staying contrarian… his bet against Wall Street, Matt Drudge
• College costs continue to defy logic… tuition, fees, expenses rise despite global deflation
• Plus, Patrick Cox explains “one of the most important public health breakthroughs in decades”

  Here’s one of the more convincing series of charts we’ve seen in a while… bailing out the big U.S. banks -- at least the way our government did it -- was not a good idea:

In the year ending June 30, the biggest five banks in the U.S. grew deposits by 29%, the FDIC said this week. In dollar terms, that’s over $852 billion in deposits over the last year. But in spite of this, and the over $100 billion in TARP funds they’ve received, lending has increased only $564 billion.

So for all our troubles -- the billions of taxpayer dollars, the tireless political battles, the violent market swings -- what have we gotten in return? Too-big-to-fail banks are even bigger, and they are hoarding their larger market share. We can hardly blame them for it, but from the taxpayer standpoint, heh… looks like we got the shaft.

  “Lending money to customers is a tough way to earn a living,” Bill Bonner notes. “The more you lend, the more you make... until you lend too much. Then, you don't make anything.

“Of course, speculating is a tough business too. But it's a lot easier when you can borrow from the feds at practically zero interest and the government also guarantees your debts. How can you lose? Don't worry, dear reader. Bankers will find a way. They always do. Want an investment strategy that really works? Just figure out what the big banks are doing and do the opposite.

“What are the big banks doing now? Mortgage lending? Nope. Credit cards? Nope. Business expansion? Are you kidding? How about mergers and acquisitions? Not really.

“According to the news reports, the banks are making money by ‘trading.’ Trading what? Trading the dollar for things that are going up.

“Look at the price of oil -- over $79. And the price of gold -- over $1,050. Compared to each other -- oil and gold -- prices are stable. But against the dollar, both are rising. In other words, people with dollars are trading them for oil and gold.

“And not just oil and gold. While U.S. stocks have gone up 50% or so in the last seven months, emerging markets are up twice as much. Argentine stocks -- who would have believed it -- have doubled. Indian stocks are up about 80%.

“Well, let's see... If the big banks are getting rid of dollars... Hmmmm... Do we want to get rid of dollars too? Maybe not quite yet.”

  A sign of the times, wrapped in a contrarian alert: A headline regarding a weakening U.S. dollar has appeared on the Drudge Report 18 times in the last 21 days, notes the Pew Research Center’s Project for Excellence in Journalism. Could the Demise of the Dollar be any more mainstream?

(At the local Rite Aid this week, we overheard two clerks talking about the weak dollar. We only caught the end of the conversation: “Not like the dollar is worth anything anyway,” one quiped, not a day over 18. We may be jumping to conclusions, but we doubt she read that in The 5.)

  Right on cue, the world regained their appetite for dollars yesterday. U.S. stock indexes fell about half a percent, and the dollar index rose from its yearly low of 75.1 to 75.5.

  The “real” currency story today is the Brazilian real. It fell 3.5% versus the dollar yesterday  -- two full cents, to $0.56. Evidently, the spot real-to-dollar contract on the Brazilian exchange saw the biggest daily volume in history, over $520 million in bets changing hands.

“The Brazilian gov't is imposing a 2% tax on capital inflows,” explains our friend Chuck Butler. “This was done in an attempt to slow down the Brazilian economy by slowing down the ‘hot money’ that's going into the Brazilian stock market by foreigners. Talk about throwing a cat among the pigeons!

“I tend to think there's something up Bullwinkle's sleeve here. Recall that about a week ago or so, Brazil's central banker had mentioned the need to raise interest rates 200 basis points (or 2%). So the gov't sees the real responding to that comment and thinks, "Oh my God, we've got a big problem when rates really do go up 2%, for this real will skyrocket! What's a gov't to do? Ahhh, we'll impose a tax to offset the rate hikes, thus currency neutrality.’

“So I still like the real, but this really points out what I've been trying to say for some time now: These emerging markets currencies are big swingers: When they're going good, they're really good, but when things go awry, they really go bad, fast! But that's their game. As long as you know it, no biggie!”

If you’re looking to diversify into the real without suffering those big swings, might want to check out Chuck’s MarketSafe BRIC CD. Backed by his EverBank crew, it’s principal-protected exposure to the real, ruble, rupee and renminbi… details here.

  That stronger dollar ended the recent commodity rally. Oil gave up the $80 level as quickly as it had found it and goes for $78 a barrel as we write. Gold shed about $10, to $1,055 an ounce.

  The ports of Long Beach and Los Angeles just reported their worst September in nine years. We’re told September is usually the best month of the year for the two ports, the biggest in the U.S. and together the fifth largest in the world. But this month, container volume fell 16% from September 2008 in LA and 19% in Long Beach. For the first nine months of this year, port traffic decreased 16% in LA and 25% in Long Beach. Heh, how’s that for mud in the recovery’s eye?

According to global shipping researcher AXS-Alphaliner, each of the world’s 17 largest shipping lines were losing money through the first half of 2009.

  And now for something we struggle to understand:

During the greatest deflationary period of our time, college costs have managed to maintain their nauseating rise, a College Board study confirmed yesterday. The group attributed the uncanny inflation to shrinking university endowments and a rise in applications -- a combination of the biggest high school graduating class in U.S. history and those poor souls who think they can “hide” from the recession by going back to school.

What’s more, the credit crunch has put the kibosh on state funding, which is down 5.7% per student this year. So naturally, these eager students have filled that void with debt -- student loans are projected to rise another 5% this year, as they have for the 2007-2008 and 2008-2009 academic years.

  “This ranks as one of the most important public health breakthroughs in decades,” says our tech analyst Patrick Cox, with your investment opportunity of the day.

“A trickle of solid peer-reviewed evidence that most people are severely vitamin D deficient has turned into a flood. If the new consensus is correct, and I believe it is, increasing your vitamin D level could, for most people, add years of healthy life. It could also save the U.S. economy hundreds of billions annually…

“D is not just another nutrient. Putting it simplistically, it is the über-nutrient that affects the way all other nutrients, not just calcium, are utilized. Virtually every cell in the body has a D receptor, even those in the brain. Until recently, however, few asked why. This is a particularly interesting question because there is very little vitamin D actually available in food. Most of our nutritional D, in fact, is added. Historically, the primary source of D, not only for humans, but for many other animals, has been sunshine. We convert the energy found in ultraviolet B in our skin to vitamin D. Obviously, there is something critically important about D if our prehistoric ancestors could manufacture it even during times of famine.

“Now we see a compendium of solid peer-reviewed research indicating that many of our most troublesome and expensive diseases are symptoms of vitamin D deficiency. Rickets, apparently, was only the tip of the iceberg. Other diseases on the list of conditions caused or exacerbated by D deficiency include cancers, diabetes, susceptibility to bacterial and viral infections, autoimmune diseases such as multiple sclerosis, psoriasis, heart disease, stroke, osteomalacia or age-related bone mass thinning, osteoporosis, depression and even food allergies. Obesity, in fact, is highly correlated with vitamin D deficiency. In many of these conditions, risk factors drop within months, and by as much as 80%.

“I know, I know. This is a financial newsletter, but living a longer healthier life is not just an end in itself. It is the most important component of an optimal financial strategy… The nature of exponential growth is simply this: The longer you live, the faster your portfolio grows.”

Amen. Besides, what investment theme could be more lucrative than one that lengthens all our lives? For Patrick’s specific advice on investing in life expansion technology, look here.

  “I attribute this [housing crisis] mainly to the bankers,” a reader writes, continuing our conversation from yesterday. “Why? In 2003, as a life insurance agent and ‘financial adviser,’ I would get people telling me the latest ‘great deal.’

“One time, my office general agent, sort of supervisor, had a mortgage broker come in to talk. He was recommending that we tell our clients to refinance, take a big chunk of money and put it into a life insurance policy, which would make me a big commission, and take a Libor 1% loan on the house.

“Frankly, I was shocked and incensed. ‘What happens when interests rates inevitably rise?’ I asked, for which the jerk had no answer.

“Indeed, I lost my best friend as a client when another adviser convinced him to do the same thing. Those liar loans were deliberately encouraged by the banksters… You'd think that Agora readers would be a bit more sophisticated than to swallow the libertarian "personal responsibility" mantra uncritically at this point.

“People depend on their financial advisers, but what if the advisers are controlled by the banks and brokerages themselves? So the primary responsibility falls to the fraudulent loans that were engineered from the bottom up to the CMOs and swaps by the bankers, the Fed and for all I know the Illuminati and lizards.”

Thanks for reading,

Ian Mathias
The 5 Min. Forecast

P.S. We want to e-mail you 24 of our best options recommendations -- for free. Find out how to sign up, right here.
 

by Addison Wiggin & Ian Mathias

• Wave of good earnings reports, but stocks fall… Dan Amoss on this “rented rally”
• Addison Wiggin shares one key takeaway from this year’s Value Investing Congress
• Chris Mayer journeys into the nexus of the Indian gold trade
• Commodity bulls take note: How the stock rally could bump resource prices another 50%
• Plus, could the housing bubble be back already? Scary signs below

  Interesting day to be watching stocks… have the tables turned?

This morning had all the makings of the typical 2009 market rally. Check out these earnings, all within the last 24 hours:

· Apple reports a 46% jump in profits from last quarter, beats estimates by 17%
· Caterpillar reports 64 cents a share worth of earnings -- more than 10 times Wall Street estimates
· Coca-Cola comes in line with expectations
· Dupont beats earnings
· So does Pfizer
· United Tech loses money, but revenue tops expectations
· Ditto with Bank of NY Mellon
· Texas Instruments beats estimates and provides better-than-expected forward guidance.

So that’s good news (by 2009 standards) from essentially every sector, including five Dow components. Naturally, the Dow -- which has been ignoring economic fundamentals for months in favor of poor, but still better-than-expected earnings -- quickly breaks its four-day winning streak by plunging 0.75%. Say what?

Looks like beating Wall Street’s estimates can no longer satisfy the mob.

“A rational, disciplined investor would be fearful about buying today,” notes Dan Amoss, “after prices have been jacked up by an unprecedented seven-month rally.

“Nearly every economic and corporate development over the past few months has been translated into a reason to buy stocks. But underneath the elation over Dow 10,000 lies the palpable feeling that this rally is to be ‘rented,’ not ‘owned.’

“Bulls see this cautious sentiment as a source of more untapped buying power, but I see it as a reflection of weak hands being the marginal buyers; at the first sign of disappointment, they’ll look to sell. My read of the sentiment surveys is that patient value investors are skeptical and bearish, while momentum investors are bullish simply because prices have been going up.”

  One the most famous “patient value investors” is now buying gold and betting on higher interest rates. Sounds like David Einhorn, famous short seller of Lehman Bros. and Allied Capital has been reading The 5:

"My instinct was to want to short the dollar, but then I looked at other major currencies -- euro, yen and British pound -- and they might be worse,” he told the Value Investing Congress in NYC. "Picking these currencies is like choosing my favorite dental procedure. And I decided holding gold is better than holding cash, especially now that both offer no yield.

“Gold does well when monetary and fiscal policies are poor… Over the last couple of years, we have adopted a policy of private profits and socialized risks -- you are transferring many private obligations onto the national ledger."

Einhorn also said he is buying long-term options that will profit if/when the fed funds rate increases. (If you’d like to follow suit, consider TBT or RYJUX.)

"Einhorn's comments will come as no surprise to readers of The 5," adds Addison Wiggin who is attending the Congress with Chris Mayer and Dan Amoss. "But it's not so much WHAT was said as WHO said it and WHERE. Einhorn's point of view came as a shock and subject of some discussion among the professional fund managers here. They’re more accustomed to discussing the turnaround team being implemented at Starbucks or the value represented by Waste Management than they are discussing gold’s role as a monetary asset or long-term interest rates being forced up by reckless spending in Washington. Heh."
 

  The U.S. government finalized its 2009 budget deficit this week: $1.417 trillion. The fiscal year, which ended a few weeks ago, will officially go down as the worst since 1945, with a deficit of 10% of our GDP.

  Our government should “develop a fiscal exit strategy which will involve a trajectory toward sustainability,” Fed chief Ben Bernanke opined in a speech Monday. Heh, look at you, Mr. Bernanke… defender of fiscal responsibility!

  At $1,060 an ounce as we write, gold is about $5 stronger today.

  Another feather in gold’s cap: For the first time, a major global exchange will accept gold as collateral. The CME Group, the world’s largest derivitives exchange operator, will take physical gold for things like margin requirements -- an industry first.

“We just visited India’s biggest gold market maker,” notes Chris Mayer, who returned from Mumbai over the weekend. “We entered a decrepit building with towering slums around it. We got in a creaky elevator little bigger than a phone booth, with an attendant who opens and shuts the door. The elevator looked about a hundred years old. We got to our floor and went down a filthy hallway so narrow that you had to turn your shoulders to get by other people in the hall. Finally, we got to this gold merchant’s office.

“When we got inside, we entered a modern-looking office -- clean, wooden floors; air-conditioned; a wall-mounted TV playing the Indian version of CNBC. You’d never know the squalor and chaos that exists just outside the door.

“We were led to a small conference room where we waited for our man. After a short time, the gold broker walked in -- he’s a big bear of man with gold hanging on his neck, his wrists -- even his eyeglasses were rimmed with gold. He represented the prosperous side of Mumbai…

“We got his take on the gold market. He’s bullish, which you may discount, but remember he’s a broker. He makes money on transactions, not on the gold price. He tells us India’s gold demand is strong and growing. India has long been a net importer of gold, since it makes very little gold itself. It also makes up nearly a third of total demand for gold. ‘People here buy gold routinely, as a store of wealth,’ he said. ‘People from the villages even buy gold and bury it in their backyards.’

“It’s something we’ve found often on our New Silk Road Tour. People are increasingly buying gold -- whether in Dubai or Mumbai. For these cultures, unlike for most Americans, buying gold is a social norm, a rather mainstream place to park your wealth. India, as it continues to grow in wealth, should be a steady buyer of gold for years to come.”

That will surely benefit the gold miners in Chris’ Special Situations portfolio… currently available for your review for just $1.

  American producer prices are still in a state of deflation, the government claims today. The producer price index fell 0.6% in September and a stunning 4.8% over the last year.

A fall in energy prices accounted for 90% of September’s fall… perhaps a decline we shouldn’t count on in the future:

  Crude oil hit another 12-month high of $80 a barrel yesterday.

  “The overall market and the commodities market are inextricably tied together,” notes our resource trader Alan Knuckman.

“The S&P 500, the stock market in general, has been a leading indicator for commodities. With stocks up over 50% from the lows, it provides insight into future moves in other markets. The Commodity Research Bureau CRB Index broke above the 267 level, making new yearly highs last week. It’s now on target for the 335 objective, which represents a 50% rally in commodities.

“Higher oil prices (wow, what a turnaround in the last two weeks, from $65 to $80) are a good sign that the global economy is on the mend. In addition, it is supportive of stocks, with Exxon and Chevron adding major points to the Dow, sending it above 10,000. Whatever the reason, it helps to note that our RTA picks are on target for now.”

They certainly are. Resource Trader Alert readers bagged 106% gains with their crude oil calls on Friday, and Alan tells us, “We've still got a profitable play that we're holding for February. We're already in the money, but as crude rallies, we'll be set to profit even more!" If you seek resource profits, Alan’s the man… join his ranks here.

  Sigh… the dollar hit another yearly low this morning. The dollar index fell as far as 75.1, about three points from its all-time low.

  Today’s dose of sobering perspective:

“The U.S. has shed 7.2 million jobs,” reads today’s WSJ, “since the recession began in December 2007, the deepest contraction since the Great Depression. Even if the job market started spitting out jobs as fast as it did during the 1990s boom, adding 2.15 million private-sector jobs a year, the U.S. wouldn't get back to a 5% unemployment rate until late 2017.”

  Housing starts rose 0.5% in September, less than the Street expected. The Commerce Department says builders broke ground at an annual rate of 590,000 homes last month, below economist expectations of 610,000. As we’ve said before, we celebrate any and all housing starts disappointments… what sense is there in adding more new homes in a time of historically high supply and low demand?

  And yet… could the housing bubble be back already? We’ve come across several jaw-dropping bits of news this week, all of which lead us to fear that the Wild West world of subprime lending has been replaced by too-good-to-be-true foreclosure deals and the ‘benevolence’ of the FHA. Read this article for more, or this one -- a 20-year-old buys a $155,000 house with a $183,000 FHA mortgage, with 3.5% down.

Incredible, eh?

  “You asked at the end of the last 5 that the phony-baloney mortgage debacle will ‘end in tears for someone, but whom?’” a reader recalls, referring to our coverage yesterday of the housing “shadow inventory” -- where homeowners have stopped paying their mortgages and banks are too afraid/weak to repossess.

“Wait, wait! Choose me! An easy one, teacher! In a word, ‘taxpayers.’ Another equally good answer, ‘the man and woman in the street.’ Finally another easy, but ominous answer, ‘the regular small investor.’ Let's just hope we don't hear the usual, ‘Why didn't anyone say something?’ Or ‘We didn't see it coming.’ Your readers, at least, will have no excuses.”

  “I know how it will end,” adds another. “It will end in tears for all of us. Some will have crocodile tears, but most of us will have real ones. The banks that are on the hook for those and other such properties were lending out my money and yours and others’. Those who took out the loans are now thieves, stealing from you and me and the rest of us. Their signatures on the ‘promise to pay back’ loan papers prove it. They have no integrity and no honor. I hope their relatives that buy the next house don't have any either and don't sign the new house over to them. It would serve them right.

“Perhaps you are right, we should all just buy gold with whatever money we have and let the chips fall where they may. Also, can you tell me who and where they are/live? I'd like to go by and s$*! on the hoods of their cars.”

The 5: Heh, easy…

We got quite a few e-mails berating these homeowners, and for good reason. You’re right… it’s not an honorable choice, to say the least. But not a single reader wrote in scolding the banks. What’s up with that? In Baltimore parlance, the homeowners are the junkies and the banks are the crack dealers… who is the greater villain?

Thanks for reading,

Ian Mathias
The 5 Min. Forecast

P.S. Fair warning: In less than 72 hours, your opportunity to save $495 on our “most bankable research” ends. This year alone, readers could have already made $91,127 profit. So you don’t miss out, I urge you to click here now and lock down your extra-low subscription rate, BEFORE the Thursday deadline.

P.P.S. A short mea culpa from Addison:

"Looks like the travel schedule finally caught up to us. We've recently made two errors in The 5, which we'd like to correct today. Upon introducing our colleague Chirag, we mentioned the gold-backed ETF he manages for Quantum Fund is backed by 10-gram units. The actual units are half a gram a piece. Apologies, Chirag.
 
"The second is a little more embarrassing. We published some comments by our friend Ajit Dayal, who was featured in an interview on the BloombergUTV home page. He said specifically "We believe the Indian markets will rise very sharply in the next week." Ajit was indeed correct the market did rally rapidly... but the interview was recorded back in May! Ajit was forecasting what he expected following national election results. Ugh. Here's how we covered the event in real-time. Again, apologies, Ajit.

“For the record, that's only the second set of serious errors we've had to correct in the life of The 5. We'll continue to do our best to get the story straight for you.”
 

by Addison Wiggin & Ian Mathias

• Oil hits new yearly high… Byron King on the re-emergence of energy scarcity
• Brotherly feud epitomizes India’s Achilles’ heel… Addison Wiggin’s report from abroad
• Another bank bites the dust, FDIC admits it’ll be out of money… for the next two years!
• Greg Guenthner’s favorite way to play the coming Rio Olympics boom
• Plus, readers write on hidden inflation and “shadow inventory” of foreclosed homes

  Has the great oil “re-flation” trade backfired? While we were sleeping this morning, Asian traders (or Western insomniacs) seemed intent on finding out:

No real news snapped crude oil out of its five-month trading range of $65-75 a barrel… just the usual global rebound buzz. You can’t even blame the dollar -- at 75.5, the dollar index is still lousy, but a few tenths of a point above last week’s 12-month lows.

So we wonder, at what point will this recovery trade start stifling the recovery? $80? $100? Or will gas have to cost $4 a gallon again before anyone notices? And if demand really is rebounding, can the world supply handle it?

  “It might be a comforting thought to believe that world oil output can increase,” adds Byron King. “Indeed, many policymakers in the U.S. and Europe apparently dream themselves to sleep at night pondering how the current oil volume of about 85 million barrels per day could move upward to, say, 95 million barrels per day – ‘if only the world oil industry were more efficient.’

“Yeah, right. Except the global oil industry is not that model of dreamland efficiency. Sure, there are some bright spots. The big internationals like Exxon Mobil, Chevron, BP, Shell, etc. are good. There are some really good state oil firms like Brazil's Petrobras and Norway's StatoilHydro. Saudi Aramco is outstanding. These guys are all doing great work to keep the world's pipelines and tankers filled.

“But much of the rest of the world’s oil industry lacks the knack for capital discipline and crisp project execution. Venezuela's oil industry is a basket case, what with the Chavez-led nationalizations and mass firings of recent years. Output is falling in Venezuela, and this from a nation with among the largest hydrocarbon reserves anywhere in the world.

“Mexico's national firm, Pemex, is nothing but a piggy bank for the politicians, who suck most of the investment capital away from the oil patch and into their own boondoggles. Thus is Pemex walking off a cliff of underinvestment, depletion and decline. According to Matt Simmons, Pemex may not be exporting any oil at all to the U.S. within 18-24 months.

“Iran's oil industry is in a slow death spiral, despite the occasional report of Chinese assistance with field development… Next door in Iraq, chaos reigns. The Iraqi oil legislation is so burdensome that almost all players within the international energy industry are spurning Iraq, including the Chinese. Wow. When the Chinese won't invest in your oil fields, there MUST be something wrong.

“And so it goes. The bottom line is that we should expect a global oil shock by 2012, or earlier if global economic activity kicks into high gear. Oh, well. It only means that the deep-water guys will do that much better as things unfold.”

Those “deep-water guys” are just one facet of Byron’s Energy & Scarcity portfolio… check it out right here.

  At least our oil isn’t locked up in a bitter fight between two brothers. That’s the crazy state of affairs in India this morning… the Ambani brothers, the seventh and 34th richest men in the world, are quarreling over the Krishna Godavari basin, India’s biggest source of natural gas.

While they fight each other for the $17 billion chunk of land (with the government’s “help”), India’s having a hard time finding cheap energy and an even harder time convincing anyone in the industry to set up shop in the region. For example, as Addison reported last week during his trip to Mumbai, the government’s latest auction for oil and gas projects didn’t even receive a single bid for 34 of the 70 blocks on offer.

"Indian lawmakers passed a freedom of information act several years ago," Addison adds. "We heard several bussinessmen, brokers and traders mention the new law as the best chance at cleaning up India's monumental level of corruption. The law requires public officials to reveal how much and from whom they've received payments. Even so, feuds like that between the Ambani brothers represent the highest level of coziness between industry and government... and as the failed auction from last week shows... India's biggest challenge in attracting capital from investors around the world."

Addison and Chris Mayer will end their “New Silk Road Tour” today, in New York City, of all places. They’ll be checking out the Value Investing Congress, where many of the issues we discuss in The 5 are front and center. Stay tuned for highlights.

  Gold’s right where we left it Friday, around $1,055 an ounce.

  Another bank failed over the weekend, bringing the yearly total to 99. The FDIC shut down San Joaquin Bank of California, at a cost of $103 million to the Deposit Insurance Fund. (At least… the FDIC entered a $683 million “loss-share agreement” with Citizens Business Bank, which will take over San Joaquin.)

By the way, the FDIC’s Deposit Insurance Fund will likely run a deficit through 2012, Chairwoman Sheila Bair admitted last week. The fund dipped into the red sometime this summer, and in testimony before Congress last week, Bair said it would be two years at the earliest before there is actual money in the fund that’s supposed to backstop our savings accounts. Heh, very reassuring.

The FDIC estimates bank failures through 2013 will cost the government arm another $100 billion.

  Stocks are off to the races again today. Like oil, no single piece of earth-shattering news has the S&P up over 1% as we write… other than the fact that 79% of S&P companies that have reported third-quarter earnings so far have beaten estimates.

  In fact, market volatility is at a 13-month low. The VIX -- a gauge of trader uncertainty -- is down to 21, the lowest level since pre-Lehman crisis. It’s actually fallen 11 days in a row, the longest losing streak since 2005. (Contrarian alert!)

  “When the International Olympic Committee announced Beijing would be the venue for the 2008 Summer Games, Chinese investments flourished,” recalls Greg Guenthner.

“A combination of hype and fundamentals drove this spectacular rally. Investors who bought on the news and sold as the hype reached fever pitch only months before the games began were handsomely rewarded.

“Now with almost seven years until the 2016 Summer Olympics opening ceremony in Rio, it’s Brazil’s turn to make early investors rich yet again.

“We already have an over-the-counter Brazilian stock in our portfolio -- and it’s been on quite a run over the last couple of days. But before we get to the details, it’s important to discuss just how powerful a force an event such as the Olympics can be. Sure, it’s an international spectacle. But it’s also an economic boon to the entire host city and nation.

“Take China, for instance. The city of Beijing spent $40 billion… just on venues and infrastructure. Beijing also released numbers that showed massive GDP expansion during the run-up to the games. Already growing at breakneck pace, the “Olympic factor” added more than 1% to year-over-year GDP growth.

”Many investors are already displaying their exuberance, sending Brazilian names higher after the Olympic committee announcement. We’ll be betting on the hospitality and restaurant industries, which will be in full-on expansion mode in preparation for the 2016 games. Our play in this sector in the Bulletin Board Elite portfolio has showed us a strong bounce in October, rising more than 50%.”

For more from Greg, including how this stock fits into his “30 Day Retirement Plan,” look here.

  “You pointed out that there is a reported year-over-year drop in prices of 1.3%,” a reader writes referring to Thursday’s issue. “This may or may not be true, considering that the government is the reporting source.

“If you believe John Williams at Shadow Statistics that the true rate of inflation is understated by 7% on a continuing basis, that still leaves a ‘real’ inflation rate of 5.7%. Further, if you look at this in a broader context, I would submit that inflation is really a measurement for comparing ‘buying power.’ If a dollar buys, say, a package of corn in August and a dollar will still buy a package in September, the reported rate remains flat. But since that package contains 25% less (7 ounces, instead of 9), then your ‘buying power’ has also been reduced by 25%.

“If only a trickle of the Fed's liquidity ‘escapes’ the too-big-to-fail banks and gives its usual 10:1 leverage to velocity, then hyperinflation is a looming event, and not a process. The 'Trade of the Decade,’ gold, may be the best financial advice ever. Apparently, buyers are using their ‘gut’ instincts about inflation instead of ‘reported’ numbers.”

The 5: Just as we hinted then, and as Mr. Williams shows very often, it’s hard to take the government stats too seriously. There are just too many footnotes, margins for error and political agendas knotted up in that mess. You’re observations are as good as any.

Bill and Addison’s “Trade of the Decade” is still on. Why fix what isn’t broken?

  “My wife is one of five employees at a small luxury retailer shop,” another reader writes. “Of those five, two of them (and their spouses) have been living in their $600,000-ish homes for over one year without making a mortgage payment... even though combined they make nearly $200,000 per year. They can easily afford the payments, but calculated they could live free of charge for a couple years before they would be tossed out, at which time both couples intend to buy new homes ‘near the home-market bottom’ (they figure, possibly more or less correctly) by having a relative of theirs buy the house --- with the money they saved by not paying mortgage payments for ~two years! Very crafty, no?

“My main point is the folks now entering the ‘foreclosure market’ are much more crafty and calculating on average than subprime folks, who mostly believe what pseudo-authorities say (like banks, RE agents, brokers, appraisers, etc.). Therefore, the next wave may well be dominated by folks who COULD pay their mortgage payments, but instead do whatever generates the best result for them…

“I suggest you factor in the above reality into your estimates of how huge future foreclosures might become... this may add 2-5 percentage points.”

The 5: Funny you mention this… late Friday, your editor and Dave Gonigam traded a few e-mails over this article, one of the few that we’ve seen that has the stones to address this “shadow inventory.” As the author put it, “The cork in the bottle is the different ways banks are processing their distressed properties, with some giving borrowers a three-month reprieve to stay in their homes while others are simply ignoring whole sectors where they have foreclosures to keep the toxic assets off their balance sheets.”

Oy… and how can you, we, the government -- anyone -- possibly measure such a thing? We have to think it’ll end in tears for someone, but whom?

Good luck out there,

Ian Mathias
The 5 Min. Forecast

P.S. It’s not too late to grab a one-month trial of Mayer’s Special Situations for just $1. Seriously, one dollar -- that’s it. Half a cup of coffee or a month’s worth of exclusive alternative investment advice… if it’s as much of a no-brainer to you as it is to us, look here.

P.P.S. Today’s issue marks an unfortunate first for The 5: First issue ever written in bed. Long story short, your editor’s cycling hobby caught up with him (again) at a race outside of Philadelphia yesterday. Concrete, I was reminded, is not an appropriate landing surface, and getting run over by another cyclist is about as pleasant as you’d expect. Nothing permanently damaged except the bike. Thus, The 5 lives on… from a more padded location.