Bush Bails Out Borrowers, Euro Buying Opportunity, Russians Send Wheat Higher, and More!

by Addison Wiggin & Ian Mathias

  • Top S&P 500 performers derive their revenues outside the U.S.: why you should care
  • Big surprise: Bush promises to use your money to bail out subprime lenders…
  • Bureaucrats, wonks and lobbyists make Maryland the No. 1 wealthiest state in the union
  • Buying opportunity in the euro… Russian news sends wheat skyhigh… prices prompt pasta protests in Italy
  • China’s “total economic warfare” reprise…Amoss on Dubai’s future within its unstable surroundings
  • Overtime: We bid Dr. Richebacher adieu… he will be missed.

Markets were closed yesterday for the holiday.

So… we begin today with an observation. The S&P 500 companies with international exposure have performed drastically better over the past few years than those with strictly domestic operations.

The recently created Bespoke International Revenues Index tracks all S&P 500 companies that generate more than half of their revenues from outside of the U.S.:

Investing in internationally savvy S&P companies since 2005 would have nearly doubled your profits compared to buying the whole index. For companies uniquely suited to cash in this trend, don’t miss Christopher Hancock’s Free Market Investor.

As we cautioned Friday morning, President Bush unveiled a massive bailout plan for subprime borrowers before the three-day weekend.

Bush promised to increase aid offered by the Federal Housing Authority (FHA) to “troubled” borrowers, remove tax liabilities for subprime borrowers about to lose their homes and to increase federal regulation of “predatory” lenders.

Speculators, says Bush, will not be bailed out. We’re not sure Mr. Bush can tell the difference between “speculators” and “troubled” lenders, except perhaps by checking if he can find their names on the White House speed dial directory. And… don’t you love the phrase “predatory lenders”? It’s a nice catchall for all the bad people who get lynched on the downside of the credit cycle… but were formerly heroes on the upside for helping so many people in need.

“By promising to absorb the $100 billion in subprime real estate losses,” says Adrian Ash in this morning’s Rude Awakening, with an alternate explanation of the administration’s motives, “Bush is in effect doing what many small-town U.S. banks did during the early stages of the ’30s Depression: Putting all the money where passersby will see it, right there in the front window, just to prove that the money exists.

“That way, or so the logic runs, anxious depositors will see their money’s still there…and they’ll wait a while longer before forming a queue to empty the bank in a panic.” You can check out full coverage of GW’s subprime plan in this morning’s Rude Awakening.

The euro retreated versus the dollar over our long weekend. The Esperanto currency is now barely clinging on to the $1.36 price.

“A lot of traders are beginning to see the light regarding Thursday’s ECB meeting,” says Chuck Butler of EverBank, “and realizing that there will be no rate hike at this time, and thus pulling out of euros and taking profits. I suspect we could really see this become the trade of the week, or even month, before the euro turns around and heads to 1.45.”

The ECB has been hinting at rate hikes all summer, most specifically at its next meeting, this Thursday. But times have changed… the ECB has injected billions of euros into the banking system since its last meeting, and a rate hike seems less likely by the day.

If you’re long the euro, Chuck says this week could be a great time to buy.

“Despite record spending on new oil and gas projects last year,” reports Chris Mayer, “companies found little new oil and gas reserves.” A new joint study by two industry research firms found that industry spending increased 45%. Yet that spending generated only a 2% increase in reserves.

“This reflects the high costs of production at maturing fields with declining output,” says Chris. “It also reflects difficulty in finding new reserves. This report comes on the heels of an earlier study by the International Energy Agency. The IEA pointed out that supply was falling faster than output expected in older fields, especially in the North Sea and the Gulf of Mexico.”

Are you ready? On Sept. 13, the world’s top pasta-consuming nation will put down their forks and Parmesan cheese and stage a “spaghetti strike” by refusing to eat pasta for 24 hours. Pasta in Italy has risen as much as 25% this year due to historic high wheat prices.

By sheer coincidence, Kevin Kerr will be in Milan that day speaking at a commodities investing conference. Hopefully, spaghetti withdrawal won’t prompt a marauding, angry uprising against our visiting commodity trader. We’ll keep you updated… at the very least, some entertaining pictures should come about.

Among other things, Kevin will be commenting in Milan on the fact that Russia — the world’s fifth largest wheat exporter — is considering banning the sale of wheat to foreign nations. Moscow officials are concerned about wheat’s skyrocketing price and its effect on the Russian consumer… especially on the eve of national elections.

“The announcement that the Kremlin is considering a ban on exports is absolutely one of the most bullish pieces of news we’ve heard for wheat in a while,” Kevin wrote to us. Wheat is currently priced at $8.06 per bushel. “Given this news, $9 a bushel is a real possibility,” says Kevin. “Export inspections are running very high and demand is huge.” This is a busy season for the Maniac Trader. You can follow his exploits in Resource Trader Alert.

Results from a Census Bureau study in the U.S. show that Maryland is the “wealthiest” state in the country. Hmmn…

The average household in the state where the Agora Financial headquarters are located earns an average $65,144 a year — more than any other state in the union. Runners-up include New Jersey, Connecticut and Hawaii. Of the “poorest” states, Mississippi, West Virginia and Arkansas hollow out the bottom three.

The average Mississippi household earns only $34,473 a year… almost 50% less than Maryland homes. We suppose we have the federal government — and your tax dollars — to thank for this largesse. Merci.

For the second time in three weeks, Chinese operatives have been accused of hacking into foreign government databases.

The Financial Times reported yesterday that the People’s Liberation Army hacked into Defense Secretary Robert Gates’ computer in June, which prompted American IT spooks to take down their network for a week.

Coupled with last week’s revelation that PLA computer nerds hacked into German Chancellery systems, we surmise China is on the information offensive. A couple of years ago, we published a report detailing China’s penchant for what it calls “total warfare.” Facets of that strategy include economic and IT strategies that require very long-range strategic vision. These news reports have prompted us to dig into the archives and recall our forecasts at the time. We’ll keep you posted on what we dig up….

“One part of the mortgage fallout has not been discovered on this side of the Atlantic,” notes a reader. “The Saechsische Landesbank (the Bank of Saxony) in the former East Germany invested about 1 billion euros in the America mortgage boom, hoping to profit from the (hopefully) rising interest rates. It didn’t count on the mess we’re in now.

“Result: They just folded, lock, stock and barrel! And last weekend, the Baden-Wuerttembergische Landesbank (the Bank of Baden-Wuerttemberg), with Stuttgart being the capital of the state, bought them out, since the BWL is a very rich institution. But being a andesbank (State Bank), they are owned by no other than — you guessed it — the taxpayers!!

“Who would have thought that German taxpayers would have to start bailing out greedy mortgage crooks on this side of the Atlantic?

“To keep things rather quiet, and sweep it under the rug, the BLW only made a rather short press release without elaborating on what really happened or why the SLB really failed! If the taxpayers find out what’s going on, there’ll be major uprising by the German population. But being sneaky as these financial crooks are, I doubt anything tragic will ever happen. Boy, oh boy!”

“I have seen no comments about the possible impact on fast-growing Dubai of any ruckus in Iran,” wrote another reader last week.

After The 5 responded in our flippant, superficial way, Dan Amoss of Strategic Investment added these two cents: “Dubai is likely to continue on a path of economic progress as long as it maintains very pro-free market policies — the kind that attract companies looking for a place to invest without high tax and regulatory burdens. But this is a slow-moving, generational trend; I doubt that Dubai’s economic progress can proceed without a few major speed bumps, including the possibility that Iran’s crazy leaders do something rash.

“Not only does Iran represent a constant threat to other Middle Eastern countries,” Mr. Amoss continues, “but they also need to distract the attention of their population away from a steadily deteriorating economy — one that will continue to suffocate under socialist-inspired policies (like rationing and price controls). Ahmadinejad was elected largely for his promise to ‘fix’ the economy, and that promise is clearly not working out.

“Lots of Western IT and financial companies have exposure to Dubai, but as far as I know, none of them has a critical level of exposure. In my view, the ones most at risk if the region were to descend into chaos would the Saudi/Kuwaiti/etc. oil billionaires who own assets like hotels.”

Regards,

Addison Wiggin
The 5 Min. Forecast

P.S. A few hours ago, we sent you the final reminder. You can still lock in six months of the world’s most valuable undiscovered stock research… free. But you must respond by Midnight tonight . Cheers.

P.P.S. In late July 2005, right before the start of our Vancouver conference that year, we released a book called The Demise of the Dollar. The day we released the book, it displaced the Harry Potter book then selling on the No. 1 spot on Amazon’s best-seller list and stayed there for the balance of our conference. It made for an interesting walk through the exhibit hall and bookstore.

Well, we’ve done it again. This morning when we began checking our e-mail, we saw that Bill Bonner’s book Mobs, Messiahs and Markets displaced Harry Potter and the Deathly Hallows, the seventh in the Potter series, at No. 1 for the better part of the Labor Day holiday. It’s currently sitting at No. 3 on Amazon’s best-seller list.

But here’s an interesting twist. When you buy a book on Amazon, it gets paired with another book that the publishers think you will like. “If you buy X,” the site says, “you can get Y for an x% discount.” If you’ve purchased any books on Amazon, you know what we’re talking about.

Heh. This is an exceptionally rare bit of irony that perhaps only Bonner fans can appreciate. Check it out here.
It’s also ironic that the Greenspan book has been released a week after we mourn the passing of Dr. Kurt Richebacher.

Here is an excerpt from a letter we sent to readers of the Richebacher Letter and the press:

Dr. Kurt Richebacher, famous financial commentator and forecaster of the subprime mortgage fiasco, died last week of natural causes. A iconic contrarian within the economic community and author of The Richebacher Letter, Richebacher was once described by former Federal Reserve Board Member John Exter as “one of the best economic analysts in the world.”

Dr. Richebacher most famous prediction occurred in his latter years, when in 2001 he forecasted the current mortgage meltdown with stunning accuracy. “The new housing boom is another rapidly inflating asset bubble financed by the same loose money practices that fueled the stock market bubble,” wrote Richebacher in September of 2001. He continued to chastise lenders and market makers for allowing the bubble to swell until he fell ill in early 2007, only months before the subprime meltdown began in earnest.

Dr. Richebacher’s legend was far greater than his successful prediction of the latest market downturn. His consistently contrarian viewpoints were rarely easy to digest, but always poignant, accurate, and of the highest economic caliber.

He became so well known for forecasting financial calamity, that Former Federal Reserve Chairman Paul Volker once said, “I think it’s the job of each Fed chairman to try to prove Richebacher wrong.”

Before falling ill, Dr. Richebacher was close to completing what he thought to be his life’s finest work – a successful refutation of the monetarist’s view of the great depression. Richebacher was vigorously writing his last book in an effort to support this thesis near the time of his death. His publisher, Agora Financial, is currently seeking the means and research to conclude and publish his final work.

Never afraid to offer a frank assessment, Dr. Richebacher left this world with one final prediction: “The housing bubble – together with the bond and stock bubbles,” he wrote in the final edition of The Richerbacher Letter, “will invariably implode in the foreseeable future, plunging the U.S. economy into a protracted, deep recession.”

Dr. Richebacher passed away after 88 years in this world. He was a strong, temperate soul… an old-world gentleman – literate, well-traveled, intelligent and critical. And despite all the difficulties he’d seen in his lifetime – war, depression, illness and many long years after his wife passed away – he still enjoyed a good wine, a fine meal and a challenging conversation. He will be missed.

rspertzel

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