Deciphering the Fed as Markets Rally, BDI Still Strong, Crazy Commuting Stats, and More!

August 20, 2007 by Addison Wiggin & Ian Mathias

  • We call BS on the Fed… the chart that proves they’ve already cut the
    fed funds rate
  • Markets love the juice, rebound worldwide… why is gold tracking the financials?
  • India suffers its worst sell-off since its 7% decline a year ago;
    why this is a buying opportunity
  • What credit crunch? The index that shows the global economy is humming along, U.S. housing notwithstanding
  • Hurricane Dean dodges U.S., but oil isn’t out of the woods yet
  • Can you imagine spending more on your commute than your house? Millions already are
  • A Venezuelan oil insider confirms The 5’s suspicions… calls Chavez
    a fraud… but wishes to remain anonymous

0 The weak-kneed Fed dropped its discount rate (the rate at which it loans money to other banks) by 50 basis points last Friday — taking it from 6.25% to 5.75%.

“The financial media were careful to point out that this was not the highly publicized and widely tracked federal funds rate,” comments our formerly banking friend Chris Mayer, “which officially remained unchanged. Well, I call BS on the Fed.”

“The Fed has already eased,” economist John Williams reports in his ShadowStats publication this morning, “at least tacitly… The effective federal funds rate has been between 25-75 basis points below target for the last week.”

Take a look at the chart below:

fedrate

The Fed can say what it wants. But in the real world, the federal funds rate was effectively lowered last week. They set the “target” for the funds rate at 5.25%… but the market forces have been overwhelming and forced the Fed to lower the “effective” rate — the actual rate given to banks who borrow from the Fed — to as low as 4.5% last week.

41 An official cut of their “target” rate probably isn’t far behind. “More important than the symbolic 50 basis point cut in the discount rate,” wrote Treasury Department veteran Nouriel Roubini on Friday, “was the move in Friday’s FOMC statement from the semineutral bias of the last few months to a clear easing bias.”

“For the first time in over a year,” Roubini explains, “the Fed is now implicitly admitting that they underestimated the downside growth risk: Until now, the official Fed view was that the housing recession was contained and bottoming out and not spilling over to other sectors of the economy; and that the subprime problems were also a niche and contained problem.

“The sudden shift to a strong easing bias suggests that the Fed miscalculated the housing recession’s damage to the economy and to financial markets.”

110 Following the Fed’s actions on Friday, investors in the U.S. were jubilant. They spent a rare day pushing the markets into the black. The Dow gained back 1.8%, while the S&P 500 rallied 2.4%. When the dust cleared, both indexes lost about 1.5% last week.

119 Curiously tracking the financial markets, gold got shellacked last week, falling $24 from Monday to Thursday. And then, alongside the Dow and S&P 500, it rallied on Friday back to $655.

120 World markets rebounded Friday, too. Pacific markets faired best… the South Korean Kospi, Shanghai Composite Index and Australian ASX all gained over 5%. Japan gained 3%.

128 India’s stock market proved to be one of biggest losers in the global smackdown last week. Thursday marked its second biggest loss in history. Falling 643 points, or more than 4%, the Indian market’s loss is only topped by May 11, 2006, when it fell 826 points, to 11,391, or nearly 7%.

“In its latest decline,” says Chris Mayer, preparing for our tour there in October, “India caught what ails all emerging market stocks lately, a sell-off inspired by the subprime woes of the U.S. However, the long-term story in India still stands. It’s one of the world’s largest and fastest growing economies. If the past if any guide, it is sell-offs like the present one that have created nice opportunities to get onboard.

“I’ve been studying India lately and rooting for the market to decline so that I might get some better prices. Along with China, the rise of India is one of those trends that will shape financial markets for years to come. A short-term hiccup in the stock market is not going to stop this elephant.”

202“The global economy seems to be moving along just fine,” reports Christopher Hancock, “if you stay out of financials.”

“Many people wrongly track the health of the global economy through the S&P 500. But the S&P 500’s most heavily weighted sector is financials, which have been getting the snot kicked out of them recently.”

“Does this look like a market during a correction to you?”

BAltic Dry

“The Baltic Dry Index is a leading indicator of demand for basic industrial commodities. And a reflection of world trade, as a key barometer of the overall health of the global economy.”

“Repeated record highs in Asian markets this year have kept the BDI on a steady rise — despite the ‘credit crunch.’ Southeast Asia and parts of the Middle East are continuing one of the greatest infrastructure booms of all time. And that growth will require massive amounts of steel, copper, cobalt, aluminum, cement, etc. Despite the massively mismanaged mortgage market in the U.S., we don’t see this trend ending anytime soon.”

Mr. Hancock has been building a “safe haven” portfolio of stocks that will help you get out of financials and exposure to the subprime mess and into companies benefiting from the boom in global trade outside the U.S.

302 Consumer sentiment in the U.S. has fallen to a one-year low this month. The University of Michigan Surveys of Consumers scored consumer’s sentiment at 83.3 so far this month… well below the median 88 and down significantly from last month’s score of 90.

The survey cited falling home prices, market turmoil and slightly more expensive oil as key contributors to falling consumer sentiment.

318 The average commuter in Houston spends over 20% of their annual household income on “getting to work,” says a survey released today by the Surface Transportation Policy Partnership. In other words, the average commuter in the Texas city spends more on getting to work than any other expense, including home ownership. Why? 94% of all workers in the Houston area drive to work, mostly from one of Houston’s rapidly growing suburban communities. In a given year, the partnership estimates the average Houstonian commuter spends 64 hours a year stuck in traffic jams. Crazytown.

Houston’s ridiculous expenses topped the partnership’s most expensive commutes list… Cleveland, Detroit and Tampa were very close behind. As you might imagine, condensed cities with active mass transit, such as New York and San Francisco, scored the best.

What a twisted world we live in, when the cost of getting to work outweighs putting a roof over your head. At our Investment Symposium in Vancouver this year, James Howard Kunstler predicted the inevitable demise of suburbia for this exact reason. Click here to gain access to Mr. Kunstler’s presentation, along with almost 30 other amazing speakers from our annual event.

345 Hurricane Dean is predicted to rise to a Category 5 level before striking the Yucatan Peninsula tonight. As of this morning, it seems as though offshore drillers in the gulf have dodged a bullet:

Dean

Forecasters don’t anticipate much disruption to the U.S. offshore drilling industry. Of the 834 American platforms in the Gulf, only six are currently evacuated, causing a mere 1.8% decline in the U.S.’s daily oil production in the Gulf.

Petroleos Mexicanos, Mexico’s state-owned oil monopoly, might not be so lucky. The Campeche Sound — a Pemex field in the southern Gulf — is home to the world’s third largest oil field. The company will evacuate 13,360 workers from oil platforms in the sound today, reducing output by as much as 400,000 barrels per day.

409 Ahead of the storm, oil shed a buck last night. This morning, light sweet crude is trading at $70 per barrel.

413“Thank you for calling Chavez what he is, a dictator,” writes a reader from Venezuela. He’s in the oil business there and close enough to Chavez that he asked not to be identified.

“You may or may not know that there were two attempts at getting rid of him via referendum. It is well known (here in Venezuela, at least) that the electronic voting was rigged. Hundreds of voting tables reported an exact equal number of ‘against’ votes. The mathematical probability of this occurrence is in the millions.

“Anyway, what you may find particularly ‘democratic’ is that all government offices have access to the voting records. If you voted against Chavez, you cannot get a job with the government or any government-owned company. Every day, the government controls yet another company. They started with petroleum and now are after ‘strategic’ companies that supply food and other essentials.

“Some places don’t even allow the entrance of anyone who voted against Chavez. Refineries, for example. In addition, they now are blacklisting all companies that supply products or services to the government by checking who the owners are and if they voted against Chavez during the referendum.

“By the way, the government claims they’re producing 3.2 million barrels per day — NOT TRUE: I deal directly with production and can confirm it’s no more than 1.9 million per day.”

445Remember John Devaney? He was the hedge fund manager who was forced to sell off his unfortunately named yacht “Positive Carry” and a $16 million Aspen mansion after losing multiple leveraged bets in the credit market. Well… now his $11 million helicopter is for sale, too.

Need a helicopter? We’ll see if we can put you in touch.

Regards,
Addison Wiggin
The 5 Min. Forecast

P.S. A study by Lehman Brothers tracked 88 different spinoffs over the last five years. Each had crushed the gains of the S&P 500 — on average — by an incredible 45% in its first 24 months. Spinoffs are among the “special situations” Chris Mayer tracks in his service of the same name.

One prime example: Stockholders of the baking queen Sara Lee owned, by extension, Coach high-end handbags and the underwear maker Hanes. When Sara Lee spun Coach off, its shares went from $2.45 to $45.89… a huge winner. Hanes went from $21 to $28.

Chris officially became our managing editor this week. As part of an all-inclusive strategy, we’re going to be outlining what we believe to be your best-bet investment trends for the rest of 2007-2008 — and sending them to you free. Your first trend arrives this afternoon, and shows you how to best use someone else’s money to make a buck, even if “financial stocks” are selling off, as they have been over the past two weeks… look for your first investment trend report this evening.

You can also check out Chris’ work in Mayer’s Special Situations, here >>

rspertzel

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