BoA’s Big Gamble, A Worthy New ETF, Dubai Buys Vegas, and More!

The four biggest banks in the U.S. — Citigroup, Bank of America, JPMorgan Chase and Wachovia –– each borrowed $500 million from the Federal Reserve yesterday.

Hmnn… why these banks? Why the same amount on the same day?

For its part, Bank of America used the cash to make a play for Countrywide Financial. BoA dumped $2 billion into the nation’s biggest mortgage company and recent poster child for the subprime fallout.

BoA bought nonvoting preferred stock at $18 per share… shares opened this morning at $24. Let’s see… $2 billion of a stock at $18… a 33% discount… $2 billion times 33% = $660 million in a matter of hours.

On paper, that $2 billion investment is enough to cover the $500 million loan from the Fed plus interest ($28 million, if they paid the overnight rate of 5.25%) and then some. Whether Countrywide will prove to be a worthy long-term investment remains to be seen. They’ll have to hold on for the ride and sell quietly when nobody is looking.

Or… better yet, take the rest of the $132 million and buy CFC puts. Heh.

The Dow and S&P 500 finished up over 1% yesterday. Since this time last week, both indexes are now up about 4%.

“The nation’s bankrupt mortgage holders aren’t any less bankrupt today than they were before the Fed reduced short-term interest rates,” Eric Fry reminded us in this morning’s Rude Awakening . “And the nation’s almost bankrupt mortgage lenders aren’t any less almost bankrupt. But the Fed’s magic makes everyone feel better; it makes them believe that everything’s going to be OK. And so share prices go up… for a while.”

13,000 people working for mortgage lenders have been fired since Friday, estimated NPR this morning. More than a dozen lenders have closed their doors this summer, and as Dan Amoss predicted in yesterday’s 5, the “credit crunch” has, and will continue to hurt more than just the market. Consumer spending and employment are dead center in the crosshairs, too.

The latest ABC/Washington Post Consumer Comfort Index plunged 9 points, to -20 — the biggest one-week drop since the index began in 1985.

The measure ranges from -100 to +100, and is based on the results of 1,000 interviews concerning the national economy, personal finance and the “buying climate.”

All three components fell last week, and the index as a whole currently rests at its lowest level in over a year. The average score for is 2007 is -7. Of interesting note, women were almost 20% more negative about the consumer economy last week than men. Ladies ranked their comfort at -15, while men gave it a +3.

“Allowing mainland citizens to invest in the Hong Kong stock market,” says Christopher Hancock, still reeling from yesterday’s big news, “is the most significant move by Beijing to liberalize the country’s capital account to date.” The capital account is the net result of public and private international investments flowing into and out of a country.

“Releasing capital account control is the next step toward the eventual flotation of the renminbi,” says Chris. “China took the first step in December 1996, when it made the renminbi convertible for current account transactions, removing both quantitative and regulatory restrictions on the use of foreign exchange for current account transactions. China’s WTO accession in 2001 has also been seen as a catalyst for capital account liberalization and currency convertibility.”

When considering total Chinese household savings — $2.2 trillion — plus all the possible margin that could be summoned by over 1 billion Chinese citizens, potentially trillions of dollars could leave China. Aside from drastically affecting markets, the yuan and Hong Kong dollar could see drastic swings.

The first agriculture business ETF will soon make its debut. Chris Mayer — a believer in the short-term future of the agricultural business — reports:

The world of exchange-traded funds — essentially, mutual funds that trade like stocks — is always an interesting window into what is becoming hot with investors. For example, water ETFs have proliferated since the first one arrived in late 2005/early 2006 and as investors key in on the water story.

“This new agribusiness ETF will appear soon on the Amex under the ticker MOO. The ETF, sponsored by Van Eck Global’s Market Vectors, will track the DAXglobal Agribusiness Index, which is made up of 40 publicly traded companies involved in agricultural operations, chemicals, equipment, ethanol and biodiesel and livestock operations.

“What’s always interesting is that these ETFs create steady buyers of the stocks in the index, especially as the EFT gets popular and accumulates assets (the first water ETF, for example, has nearly $2 billion in assets).”

In other words, not only will the ETF’s shares rise with investor buying, but so will the stocks within its portfolio.

Next time you cash out after a night at the craps table, you may be paid in dirhams!
Well, not exactly. But yesterday, the Dubai government bought a 9.5% stake in MGM Mirage — owner of one-third of the Las Vegas Strip. Coupled with the deal was 50% ownership in the yet-to-open City Center, a 76-acre MGM development of hotels and condos smack dab in the middle of Las Vegas.

The price tag of this relationship? $5 billion.

Dubai officials have already announced plans to apply for gaming licenses in Las Vegas and Atlantic City, and will be entitled to purchase up to a 20% stake in MGM in the future. MGM already owns the City Center, Bellagio, Mandalay Bay, Treasure Island, Circus Circus, New York New York, Monte Carlo, the Mirage and, of course, the MGM Grand.

In other words… Dubai is officially “in” Las Vegas… in a very big way.

“I have always enjoyed your various pubs… the new format for this 5 Min essay is great,” writes a reader. “Regarding your discussion of coal in China:

“On our recent tour in China, had four-day cruise up Yangtze River — through the gorges. Not only is the river full of barges loaded with coal, but also I was surprised to see that where the rock formations on the sides of the gorges have been cut by centuries of river there are big, black seams — yes coal — and sure enough, there are coal extraction operations — I don’t know if it can be called mining — but one sees conveyors and chutes directly down from the coal seams to waiting barges — pretty efficient, if you ask me.”

“I spent six weeks in Beijing” says another reader, “this past February and March (going to intensive Mandarin language school), and if there is one glaring factor, it is that in the big cities at least, young men and women are having difficulty finding each other for romance and marriage. I know this contradicts what the statistics imply, that there are too many men and too few women, and that this can lead to restlessness and trouble.

“But in the cities at least, where thousands come from the countryside to look for work, the opposite is the case. People, especially the men, are so intent on their careers that they seem to be rather ignoring the ladies. And the lovelorn women are withering on the vine.

“The traditional ways that lead to marriage, arrangements by families, are losing their influence and with nothing, including (legitimate) dating services, to replace them, people are just drifting. I saw this myself throughout my stay in Beijing in my school and wherever I went, and my heart went out to the many, many young women who are longing for a man. Especially after age 26 or 27; then they start to panic. China is full of panicking, despairing women.”

The 5 responds: “Longing” women in their 20s, eh? Ian’s vacation plans have officially been changed.

“May I know what the hell is going on with silver?” asks a reader. “It went down dramatically yesterday, and it has been decoupling from gold in the last months. When materials went up, it lagged, and when they went down, it crashed. Any light on this subject from you will be deeply appreciated. Hope to see Doug Casey here in Buenos Aries soon. If he likes polo, no better place than this.”

The 5 responds: “The silver market is certainly lagging gold,” says our in-house commodities man Kevin Kerr. “Having said that, gold and silver will likely rally sharply when investors least expect it, I think fairly soon, especially if the dollar drops dramatically. Silver has been a market about as interesting as watching grass grow. However, it’s one of those markets you don’t want to turn your back on, lest you see just how powerful it is.”

Silver is a much smaller (read: volatile) market than gold and has very significant uses as an industrial and precious metal (of the 912 million ounces of silver used last year, about 430 million ounces were used industrially). Thus, it can be tough to map silver’s path. For a truly risk-free bet, check out EverBank’s MarketSafe Silver CD. It’s like any other principal-protected CD, except your returns are based solely on silver’s spot prices… a neat way to play the market without putting capital in jeopardy. Click here for more.

And be careful what you wish for with that Doug Casey fellow. We’ve seen him bring people to tears with a simple 30-minute conference presentation… we’d hate to see what he could do with a fast horse and a big mallet. For a taste of Mr. Casey, check out his presentation at our Vancouver event last month.

Regards,

Addison Wiggin
The 5 Min. Forecast

P.S. Ron Paul recently gave Bill Bonner’s new book a read , and said that Mobs, Messiahs, and Markets “entertainingly and irreverently investigates the ‘do-gooders’ and ‘world-improvers’ who stir up mass hysterias, unjustified wars and financial crises, while at the same time it warns readers how to better protect themselves and their pocketbooks.”

Sounds about right to us… If you too would like to check out our venerable leader’s latest work, click here.