Politicians Gang-Up on Subprime, Bernanke Speaks, Bogus GDP, Wheat and India Prosper, and More!

by Addison Wiggin & Ian Mathias

  • PIMCO’s Gross is going to get his wish… Pols to the rescue! Never met a crisis they didn’t love. Our advice: Shield your ears and run for cover…
  • Since when is the Fed supposed to “promote orderly functioning markets”? Since 10 a.m. this morning, apparently
  • Market woes got you down? An easy correction hedge, courtesy of your Rude brethren
  • A domestic way to play the Chinese boom in middle-class consumers; Mayer discovers yet another market on the rise
  • Wheat continues to rally: Have you banked your 90% gainer this week?

A day late and a paper dollar short, as usual, but predictable as the sunrise. Here come the politicians:

George W. Bush is expected to propose multiple initiatives to bail out troubled homeowners in a statement today. The president will outline reforms that will help keep subprime and struggling borrowers in their homes — and keep Fannie Mae in business.

“Maybe this will protect us from the subprime fallout.”

No one really knows how he will pull this off. Least of all, him. But you can bet your last yuan the proposal will be audacious and its funding will come at your expense… capital for refinanced, bailout-rate loans doesn’t grow on trees. But it does get printed in dollars. Looks like Bill Gross is going to get what he wanted.

Not to miss an opportunity on the campaign trail, Barack Obama proposed yesterday that “unlicensed, unregulated, fly-by-night mortgage brokers who are hoodwinking low-income borrowers” ought to be fined and the proceeds should be used to bail out borrowers on the verge of foreclosure.

“Dear God… please help my subprime rhetoric win me more votes.”

Where were these jackasses when the market was in full swing and house prices were going up? No doubt giving speeches about how vibrant the American economy was… and lauding our ability to deliver the American Dream to anyone who wanted it. Probably buying property themselves somewhere, too.

“The Federal Reserve stands ready to take additional actions as needed to provide liquidity and promote the orderly functioning of markets,” said Ben Bernanke this morning, sitting firmly atop his white steed.

“If current conditions persist in mortgage markets,” Bernanke warned, “the demand for homes could weaken further, with possible implications for the broader economy. Further declines in homebuilding are likely.”

Hmmn… what did Bernanke say about this subprime mess back in the spring? Let’s see… [sounds of mouse clicking… tapping of computer keys…] oh, yes, here it is on May 17: “Given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited.”

And then again on that day: “Importantly, we see no serious broader spillover to banks or thrift institutions from the problems in the subprime market; troubled lenders, for the most part, have not been institutions with federally insured deposits.”

“Man, he nailed that one…” comments our sidekick “Extreme” Ian Mathias

When Bernanke was reading the tea leaves back in May, U.S. GDP was expanding at 4% annually. The Commerce Department released second-quarter numbers yesterday. Two things were obvious: a) a lot has happened in the credit markets and the broader economy since June 30, the end of Q2… and b) all nominal gains in the second quarter came from government spending… and a bunch of that spending was on the war. Neither government spending nor fighting wars are wealth-producing activities.

Currency traders saw right through the report and sold the dollar overnight. The greenback lost marginal ground to the euro and pound — $1.36 and $2.01, respectively.

Stocks in the U.S. traded timidly yesterday, too. Both the Dow and S&P 500 fell 0.4% as investors awaited pearls of wisdom from Bush and Bernanke today. Bernanke’s promise today to “promote orderly functioning markets” ought to make them punch-drunk and giddy.

Or, “If the stock market is scaring you,” says Eric Fry, “then buy yen.”

“I’ve heard this one before,” you say. “Buy yen and then trade it for Kiwi dollars or stuff it in Treasury notes and pocket the juice.”

Nope. Mr. Fry suggests you buy some yen and sit on it. “Buying yen offers a backdoor hedge against falling stock and bond prices,” explains Eric.

“Now that stocks and bonds become very volatile,” says Eric, “many yen carry trades are producing losses. As the losses mount, the pain is increasing. As the pain increases, the speculators begin to sell their ‘high-yield’ assets and repay their borrowed yen.”

And when they repay their yen, the yen goes up… and so do your profits. Eric suggests the CurrencyShares Japanese Yen ETF (FXY:NYSE) as an clean and easy way to play the yen. For a more thorough explanation, read today’s Rude Awakening here…

The Yen Scary Trade

Or if the Chinese market titillates you, buy lady’s handbags.

Citigroup recently announced it expects annual sales of luxury goods in China to grow over 21% in the next five years. Along with Goldman Sachs, the banking group estimates that within that same period of time over 100 million more Chinese people will be positioned to buy luxury nonessentials. The middle-class consumer is being spawned at a faster rate in China than anywhere else on the planet.

Louis Vuitton Moet Hennessy — the French makers of everything from fine purses to cognac — is right in the thick of it. The company reported a 30% rise in profits this year, and is buying up retail space all over China. The company’s marketers have placed their bets on Chinese consumption with confidence… an estimated 92% of Japanese women already own at least one Louis Vuitton item.

Not all was quiet elsewhere on the Asian front. A weaker yen, a coming flood of Chinese investors and overall positive industry news sent Hong Kong’s Hang Seng up1.7%, to 23,898 — an intraday record high. Japan’s Nikkei 225 piggybacked the good vibes and pushed up 2%.

Shanghai, Australia and South Korea all shot up well over 1%.

“India is experiencing a record number of share offerings,” reports Chris Mayer. “So far this year, India’s markets had $23 billion in share offerings — that’s double last year’s total. As recently as five years ago, the Indian market could not top $1 billion… Now it’s at $23 billion. Same thing on the M&A front… Total volume already hit $63 billion this year, than double the amount last year at this time.”

This is no surprise to a few managers at Merrill Lynch. The Financial Times recently reported that of all revenue collected by ML from Asia’s emerging economies, India was the No. 1 earner. “Remarkable growth,” says Chris, “and even more remarkable, it seems we’re only at the beginning of this unfolding story.” Chris and I will be reporting back to you from India in a little more than a month…

In the meantime, you should take advantage of the offer we’ve assembled for Mayer’s Special Situations — one of the few first-rate investment advisories in the business. You can get six months of the world’s most valuable undiscovered stock research… free.

Wheat prices continue to soar … up anther 22 cents today, and now wheat rests at an all-time high of $8.07. Prices have doubled already this year, and unless wheat costs plummet today, August’s 28% gain in price will mark the biggest monthly spike since 1973.

“This is astounding,” said Kevin Kerr, “even to me.” When the Maniac Trader is startled, it’s safe to call it big news.

“Grains are absolutely on fire,” says he. “I told Resource Trader Alert readers to buy wheat and soybean oil contracts on Monday, and in less than a week, those positions are up 90% and 24%, respectively.”

If those aren’t fast enough gains for you… we recommend high-limit room at the Bellagio. Kevin hinted that he may be adding a yen play to the Resource Trader Alert portfolio very soon… click here to subscribe in time .

Gold sprinted to $673 this morning, breaking away from its slow but steady rise over the past two weeks. A strong Asian and U.K. session gave the precious metal a $5 shot in the arm… dollar weakness may have also contributed to this sudden spike.

“I disagree with your take on gold being the one and only currency of value — especially in the future,” says another reader. “I remember too well what happened to the price of gold after the ’80s, and from what I read from other commentators, governments step in to manipulate the price and value of gold, and I would not be surprised to see this happen again very soon by our own government, to pump up the dollar.

“It’s OK to own some gold coins, I think, but anybody that hoards a whole bunch is just asking for trouble. Has anyone ever bothered to inquire about how many people hold gold as a hedge against the dollar?

“Hmmmm! Personally, I prefer silver as a negotiable currency, as it’s more readily available, but even then, I wouldn’t want to have a large amount on hand for ‘thieves to steal.’ Would you? Suggest you read some contrarian views about gold. It just might cause you to change your mind about its ultimate value.”

The 5 responds: We have nothing against silver, either. Not sure we’d be interested in splitting hairs between the gold camp and the silver camp. Sounds like minutiae, given the sea of paper we’re all swimming in. Our respect for gold is philosophical and historical. The book Gold: The Once and Future Money discusses silver, too… it’s a good read.

“I have seen no comments about the possible impact on fast-growing Dubai of any ruckus in Iran,” remarked a reader. “I presume it lacks a major military defense force, so I doubt all the very rich who have flocked there of late will want to stick around if a war erupts. And sensible tourists will think twice before getting too close to the front lines.

“Being a desert region means it is very dependent on a fragile infrastructure for the basics to support life, such as water and electricity. Perhaps this is why Michael Jackson seems to have moved on after all the fuss of going there? Do you have a handle on how many big companies have ‘Dubai exposure’ in addition to all the other woes of the current market instabilities?”

The 5 responds: Good question. Especially given yesterday’s rumors about the vice president’s propaganda campaign to drum up support for an invasion of Iran in September. We’re on it…


Addison Wiggin,
The 5 Min. Forecast

P.S. If you’d like to throw in your $0.02 on today’s 5 Min. Forecast, we recommend our new blog . It’s our way of giving all our readers a voice… a great chance to share your thoughts and investment ideas with our readership. Enjoy.


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