Monday, September 10, 2007

Agora Financial…Unplugged

Agora Financial…Unplugged, Part II [¹]
Click here for link to complete article:

Edited By Eric J. Fry | 10 September 2007

Adrian Ash, editor of Gold News:

Forget about commodities and T-bonds! The place to have been last month was in Yen [e.g., the FXY], not least for Aussie investors [see FXA]. The Yen has gained more than 11% against the Aussie dollar since July 24th…
        [ Normxxx Here:   You can play the spread widening by shorting FXA and buying FXY— or, if you didn't time it right, you could have gotten killed when the snap back occured and the spread narrowed drastically. ]
Equities may continue to slide from here. But the big dump’s already whacked 10% off the MSCI…The sharp move in the Yen also looks to have gone, for now at least. New corporate Yen-bond issuance fell to a two-year low in August, so the carry trade at least took a pause, even if it wasn’t unwound. Maturities on outstanding Uridashi bonds targeting the New Zealand Dollar also spiked.

Dan Denning, editor of the Australian Daily Reckoning:

Thanks everyone for the feedback. Lots of interesting and good ideas.

I had no idea there even WERE Uridashi bonds…or that the yields had spiked.

Also, I should apologize for not making something more clear: I am ALWAYS right about this stuff. Always. It’s just that sometimes I’m a year or two early on the call.

For example, I quit Penny Stock Fortunes with a circulation of 30,000 readers because I thought the tech market had topped out…in 1998. Right call, two years early.

In 2000, at "Strategic Investment" I recommended the preferred "B" shares of Freeport McMoran as a play on gold. The B shares would be redeemable at 1/10th the price of gold in 2002— right before gold’s big move. Early again.

In 2003, I recommended the Oil Service Holders (OIH) as part of the post-Iraq war strategy. I reckoned they would go from $40 to challenge their all-time high of $95. It did reach $95 by 2005…and then kept going (it’s at $180 now…Thank you Peak Oil!)

In 2004, I called the top in the mortgage-lending bubble. I recommended long-term puts on HGX, the homebuilders index. It doubled from there. I was two years and several trillion dollars in subprime mortgages early on that one.

And in November 2005 I moved to Australia to escape the decline and fall of the U.S. dollar.

What I’m trying to say is that in making my "go to cash" call now…it’s possible you have about 18 months to get out before it’s too late.

But if you use 2005 as the actual date of my call (judging by the deeds not the words), then you have about 62 days, four hours, and twenty three minutes….

You’ve been warned.

For the record, I AM presumptuous. And a coward. And a Nervous-Nelly. And many other things. But not complacent.

So I did tell the Aussie readers of our edition of Outstanding Investments to liquidate all their U.S.-dollar denominated stocks.

Many of these stocks were no longer useful because they’d appreciated so much…or because in Aussie dollar terms, they were not going up fast enough to compensate for the currency risk.

But I think it’s still worth considering whether it’s time to make a major strategic change in focus.

If not now, when?

Chris Mayer, editor of Capital & Crisis:

Jeez, man…what are you on over there? First e-mail is a doubt-filled plea for help and the second one is "I am ALWAYS right you jerks…"

The all-cash option is like the nuclear option… It’s drastic. Although, it sounds like you are not really doing that…given that you are keeping your Aussie equities.

Interesting stuff in any event…

Dan Denning:

My question about the market risk is still the same, after all the replies: if credit as an asset class is in a bear market, how will stocks go up from here?

It was the biggest bubble of all time and the signs that it’s been pricked are all around us. Yet you’re telling me the whole thing’s been factored into stock prices and earnings?


It’s not like we haven’t seen what happens at the top before. It’s just that we’re choosing not to believe the end of the credit bubble will result in falling stock prices. But why shouldn’t it?

As the Nasdaq declined to 4,900, 4,800, 4,500 there were plenty of dip-buyers. Dipwads!

Once the tech bubble burst, there was no going back. The Nasdaq fell 77% from its March 09, 2000 closing high of 5,041 to 1,114 on October 9th of 2002. And today, seven years later, the Nasdaq is still nearly 50% below its 2000 high.

Asset classes that lead one bull market up rarely lead the next one up. Instead, they go into a generational bear market, like real estate in Japan. It takes a long time to wash the taste of a crash out of your mouth.

How is today so different that a genuine bear market in credit does not mean much lower stock prices? Will the whole bubble in structured finance deflate without any impact in the real economy?

You could argue that there is real economic growth to this boom, and that this boom is global. That would give you some justification for buying stocks. But which stocks?

And more importantly, should you be buying any stocks at all right now, when the bear market in credit appears to be getting ready for something spectacular, vicious, and completely unplanned?

Of course it is probably a mistake to talk about "the stock market" and then make decisions about single stocks. So the questions I put to myself are these:
        1. What companies can grow earnings even if credit contracts?
        2. Which stocks or assets depended the most on credit growth for their rise?
        3. Is it possible the credit bubble will collapse without any long-term effect on stock prices or the real economy?
The market may have been a little over-sold by the end of August. But the "big dump" wasn’t that big and it wasn’t that much of dump. A "bigger dump" will mean much steeper falls in financial stocks and anything that depends on the U.S. consumer.
        [ Normxxx Here:   Wait until Fall, 2009! ]
Granted, you may get a few ultra-blue-chips that have lots of cash and very little debt that become "lifeboat stocks." But I think the de-leveraging of the market means much lower U.S. stock prices.

There probably ARE some quality U.S. businesses with strong balance sheets that are worth owning. I would make a list of the top ten of them and look to buy them at much lower prices. Lots of cash, little debt, and lots of tangible (visible) assets on the balance sheet.

And if I never got to buy them, I wouldn’t lose any sleep over it. That’s because I think this is exactly the inflection point we’ve been writing to our readers about for years. It’s finally here and we want to imagine that things will keep muddling through.
        [ Normxxx Here:   Still a bit early; it's why the prescient usually get killed also— just a bit earlier. ]
Maybe they will for a bit. But…

Rude Endnote: All weekend I’ve been receiving well thought replies to Dan’s question: To Cash or not to Cash? Responses range from the more predictable arguments for gold to the less anticipated advice to get into the olive tree business. There was no shortage of readers who advised that ammo and fallout shelters were the best bet, either.

Dollar in the Dumps, Heads Roll at CFC, Gold $1,000, and More!
[Filed Under Today's 5 Minutes ]

by Addison Wiggin & Ian Mathias

The Fed’s "trade-weighted" dollar index busted through the resistance point we’ve been watching.

At 77, the index is at the lowest point since the St. Louis Fed created it in 1973.

"There is more room on the downside," commented Chris Mayer after viewing this chart. "It’s hard to make a case for the dollar when so many dollars remain out there to trade— and when the central bank still seems so willing and ready to pump more dollars into the system at the merest whiff of troubles."
        [ Normxxx Here:   Be warned: our trading partners are not going to just stand idly by while the dollar falls down out of sight. ]
John Williams’ reports that thanks to recent Fed pumping, money growth is running close to 50% annualized over the past several weeks.

"It’s pretty obvious the Fed is [just] going to let the dollar collapse," writes Dan Denning from his perch down under this morning, "to prevent major recessionary pain from the housing market in the U.S."
        "Inflation has been the ‘predominant concern’ of the Fed all year long, and for good reason… the dollar has been in the pits for sometime. If the Fed’s hand is forced to lower rates, traders will surely rush in for the kill. And if there were ever a time for China to bail out of its ‘nuclear option’… this would be it.

        “Makes you wonder, could gold reach $1,000 in the next couple of weeks?"
Gold isn’t exactly in the four-digit range yet, but at $703, it looks like it’s ready to challenge its 2006 high of $720.

"Gold has headed higher as more and more people come to understand that gold does not have counterparty risk," says James Turk of "It also remains undervalued. Gold is not only a safe haven, but a good value, too."

On Friday, gold broke above the downtrend line it has followed since the May 2006 high.

Turk’s upside target for gold this year is $800.
"To be honest," he says, "I thought we would be there by now, but we’re not, thanks to the central bank. We have reached a state in the gold market where central banks cannot restrain gold at these relatively low price levels. So I still expect to see $800 this year."

U.S. stock markets took it on the chin Friday… major domestic indexes lost close to 2%.
The Labor Department’s first negative jobs report since 2003 sparked an early-morning sell-off that held steady right through the closing bell. Japan’s Nikkei lost 2%, akin to the U.S. sell-off, but otherwise, international markets were pretty flat. No contagion brewing just yet…

The fleet-footed John Williams calculates that "consistently adjusted" jobs fell 82,000, rather than the widely reported 4,000. "When the popular media and consensus economists start talking recession," Williams warns, "usually, an economic downturn already has been under way for a year or so."
        “The 2000 recession gained rapid recognition following Sept. 11, but the terrorist attacks did not trigger the downturn. The recession had been in place for over a year; the attacks only deepened an ongoing contraction. In like manner, the current recession has been under way for well over a year, but it was not triggered by the liquidity crisis that erupted in August, only intensified by it."
And the September jobs report is off to a bad start as well… U.S. mortgage giant Countrywide announced they will cut up to 12,000 jobs by the end of the year… that’s 20% of their entire work force.

"Countrywide’s retail and wholesale lending divisions plan to continue aggressively pursuing the increased opportunities presenting themselves in the current environment for profitable market share growth," said the company in a press statement on Friday. We guess that means putting thousands out of work.

In the same statement, Countrywide predicted a 25% cut in loan originations in 2008. The mortgage sector could shed as many as 100,000 jobs by the end of this year.

Stock prices for CFC fell down to $18 on the news… much to the delight of Survival Report subscribers. Their Countrywide put is currently returning 217%, and growing every time ol’ Angelo Mozilo opens his mouth.

Tropical Storm Gabrielle proved to be all bark and no bite over the weekend. She came rolling right into North Carolina, but ended up being more of a surfer’s delight and less of a destructive force.

Interestingly enough, despite Gabrielle’s tame performance, Gunner’s East Coast storm-reconstruction business saw a nice volume spike. You’ll recall from last Thursday’s 5 Min. Forecast, forecasters are still expecting a busy hurricane season. This image from NOAA seems to agree:

After having dodged Felix and Dean themselves, several pipelines owned by Petroleos Mexicanos near Veracruz were destroyed this morning by bombs. The last time guerillas attacked, in July, they stalled operations at Honda, Kellogg and Hershey.

"The price of natural gas continues to wallow around and not do much," Chris Mayer tells his Capital & Crisis readers, "but there are two long-term, seemingly relentless natural gas trends that bode well for those invested in the industry."
        “Price movement like this is making many natgas stocks “move around sluggishly like fat dogs in the noonday sun."

        “The first is the decline in productivity per well. In 1999, productivity per well was nearly 4 billion cubic feet of gas. Today, that productivity is about only 1 billion cubic feet per gas well— a 75% decline (according to the EIA and Baker Hughes).

        “Second, drilling intensity is rising. In 1999, total wells drilled every month couldn’t top 400. That figure was over 1,500 last year— yet domestic natural gas production did not increase. It seems clear the natgas industry is running on a treadmill that’s getting faster. New natural gas is getting more expensive and harder to find. This is good for drillers, as well as companies loaded with proven reserves and that have the ability to grow production. The demand for natural gas should also intensify the search for new wells."
Capital & Crisis readers have natgas drilling and production plays in their portfolio, both of which Chris says are still a "buy." Click here to check out the C&C portfolio.

Here’s an odd bit of international news. Before News Corp. offered to pay $60 per share for The Wall Street Journal, Gazprom— the massive Russian state-owned energy company— contacted Dow Jones with a rival $5 billion-plus offer.

On Friday, Dow Jones completed a regulatory filing with the SEC on Friday in which it revealed an "approach from an international oil and gas company." Gazprom, the Times of London later confirmed, was that company.

For entertainment purposes alone, we wish this deal would have gone down. If protectionists in Washington had a problem with Dubai owning ports, this would have completely flipped them out. Imagine the most influential business publication in the U.S. being run by a massive Russian energy company.

"In some ways," comments Christopher Hancock on the deal, "Gazprom is like a Sovereign Wealth Fund. It’s effectively controlled by the state, it has huge amounts of cash to spend, and it’s already diversified in a multitude of industries.

Gazprom’s reach is already astounding in Russia. Aside from controlling the biggest gas reserves in the world and an equally massive oil business, it owns Russia’s only nationwide independent television station, several newspapers and radio stations and Russia’s third largest bank.

"If anything," says Chris, "this offer symbolically illustrates Gazprom’s perch as the arm of the Kremlin. If you control energy, the media and banking… you’re holding a pretty heavy hand."

Back here in the States, apparently, a married duo of mortgage brokers fell on hard times "and so opened a brothel," reports Whisky & Gunpowder’s Greg Grillot. If there was ever a "beat" for Greg to cover, this is it:
        Police in New Rochelle, N.Y., arrested Richard Werner and Heather Mezzenga, both mortgage brokers, after the two decided to turn a home they couldn’t sell into an illegal prostitution house. According to neighbors, the couple lowered the price of the home from $750,000 to $600,000… and then, all of a sudden, the house went off the market, windows were covered in heavy shades and at least five cars started parking outside the house every night.
"Addison," Greg comments, "if our stock research service business turns south like the mortgage biz, I wouldn’t mind opening a brothel…or a drug smuggling ring…or at least a traveling carnival."

"I read an English translation of Unrestricted Warfare while living in China during 2003," writes a reader.
        "After a quite accurate assessment of U.S. military prowess, the authors concluded that the weak point of the fascist insect is the monetary system— something anybody dealing with the IRS will readily agree with. Thanks, I now have paid for property in the Highlands of Panama plus physical gold and silver."
You’re welcome. Maybe we’ll come by for a visit.


Addison Wiggin,
The 5 Min. Forecast

  M O R E. . .


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