Dollar Declines, Humberto Surprises, Japan Suffers, a New Global Boom, the Debt Ceiling, and More!

by Addison Wiggin & Ian Mathias

  • Oil spikes above $80…an all-time high… why it rose in spite of OPEC, and a nod to our Italian trading “wizard”
  • Senate panel hikes the “debt ceiling” for 5th time since W entered office… why… how… oh, what’s the point…?
  • Dollar at an all-time low against the euro… year-end predictions from our currency counselor
  • A global skyscraper boom… massive steel demand from China, India and Dubai… how to play the trend
  • Tough times for Japan… Even worse for Venezuela. Would you take out a loan with 90% interest?


Oil traded above $80 a barrel yesterday for the first time in history.

While OPEC’s production boost stole all the headlines, traders must have been reading back page stories with titles like: “U.S. Oil Supply Down 7 Million Barrels”; “U.A.E. to lose 700,000bpd from Maintenance Shutdowns”; or maybe “Energy Information Agency Cuts non-OPEC Supply Forecast.”

Kevin Kerr, our Maniac Trader, called this one when crude was priced at $73 and trending downward. Kudos, Mr. Kerr.

A quick aside; Kevin’s in Milan doing his trading-guru-conference impersonation
… but evidently the term “Maniac” doesn’t translate so well. In Italian, he’s known as the “Wizard Trader.”

“So now I am known as Harry Potter of commodities,” Kevin wrote via email, “I’m not sure about that, but will be happy to take my wand and grab some more profits this week in the grains, just like we did yesterday in the soybean oil for Resource Trader Alert.”

Kevin’s voodoo magic just netted RTA readers 50% gains on that soybean trade… in less than 2 weeks. Click here to learn more about the RTA trading strategy.

A Senate panel approved an increase of the national debt limit to $9.82 trillion yesterday.
Big surprise. This will mark the 5th time the debt ceiling has been raised since GW entered office.

Remind us again… why do we bother having a “debt ceiling”?

Not that those dollars mean much anymore. Traders knocked the greenback to the curb yesterday, down to $1.39 against the euro – another record low.

The U.S. dollar index – a measure of the dollar against all major global currencies – rests at 79.3, a 15-year low and a point above its all time worst. The Fed’s measure of the same index (TWEXM) remains at its all-time low of 76.

“The euro is on its way to 1.40,” predicts Chuck Butler, “Pound sterling, in my eyes, is still on its way to 2.10, and Japanese yen teeter-tottering but still trending to 110. I sat in the board room of EverBank in January of this year, and told the management people that these were the levels I expected to see by the end of 2007. At this point, I would have to say that I probably was too conservative with those numbers!

Think the growing debt and the shrinking dollar have anything in common? Naah…

Gold lost some luster overnight.
It’s been trading down steadily since its $710 opening in Hong Kong. Currently, it rests at $703.

Nothing happened on the major U.S. exchanges yesterday…
the Dow and S&P 500 finished almost exactly where they started. Barring Fed intervention, we aren’t planning on much action until the 18th.

Hurricane Humberto smacked the Texas coast last night with 85 mph winds.
This little fella came out of nowhere… Humberto went from a low pressure system, to tropical depression, to Category 1 hurricane in less then 24 hours.

 


Woah there amigo… where’d you come from?

Humberto rolled right through the Total SA, Valero, and Motiva oil production facilities. All told, these plants refine almost 1 million barrels of oil per day. The storm produced no noticeable strain on prices… at least, no more than low supplies of the black goo are already exerting.

Still, If you’re a Bulletin Board Elite subscriber, your Atlantic storm repair and reconstruction play made a nice jump. Gunner’s been intensely watching NOAA reports… hurricane woes alone shot up his penny stock 11% yesterday. Humberto might jack it up again, and a system about 930 miles east of the Lesser Antilles is already making news. To get in on Gunner’s micro cap pick before the next Atlantic storm, click here.

Japan… sigh … what can we say?
Just when we were getting excited about the yen carry trade unwinding in earnest, the Nipponese GDP shrank 1.2%. These second quarter numbers reflect weak consumer spending and capital investment. After 17 years of fighting deflation, they’re not out of the woods yet.

And, as we’re sure you’ve heard, their prime minister up and quit yesterday. Loser. His departure has left Japan in a bit of a panic. The Nikkei 225 has been in the dumps all month:

 

“Japan may be entering a recession,” opined our man down under, Dan Denning. We think he’s probably right. But that leaves us with a question: with Japan and the US entering a recession at the same time… Who’s going to play the role of the “economic engine of the world”?

Oh yeah…

“Steel demand in China and India,”
writes Christopher Hancock, “is still growing strongly. And the Middle East is booming.” Steel production in the hot deserts of Arabia is exceeding 9% growth per annum, a rate far above the global average of 5%.

Dubai alone is pulling in resources at an unbelievable tick… it’s estimated that over 30,000 cranes – 25% of the entire world’s supply – are currently operating in Dubai.

“There also looks to be more potential consolidation in the industry,” says Mr. Hancock following the steel industry with the intensity of a hungry feline on a spry mouse. “The money OPEC gets from higher oil prices has been used in development and construction. And that construction needs massive amounts of energy.”

As we pointed out yesterday, OPEC has been cannibalizing the oil they produce, driving prices up even further. If you haven’t already, you can get Chris’ strategy for playing the coming “skyscraper boom” in emerging markets here.

Chavez’ brilliant monetary policy combined with the global credit crunch shot Venezuela’s average overnight lending rate to 90% last night.
Yeeha!

The central bank announced Wednesday that they would no longer accept government bonds from commercial banks in exchange for cash. Banks reacted by slamming their own doors shut. By suspending a key liquidity-raising function, Chavez pushed Venezuela’s already sky-high lending rate of 22% into the stratosphere. Some banks were charging 120%.

Central Banks should be helping the poor “rather than aiding the capitalists and bourgeoisie,” explained Hugo when asked for reasoning behind his decision. At this rate, everyone will be poor in Venezuela except Hugo… so his Central Bank should have an easier task.

“David Malpass of Bear Stearns is quoted in the current issue of Forbes”
a reader brings to our attention. “Rather than a V-shaped slowdown, the landing could be softer, a saucer-shaped weakness extending through mid-2008.

“While the global boom allowed pockets of immense leverage, says Malpass, it also created tremendous gains, reservoirs of liquidity that can gradually be invested more aggressively. This argues against a sweeping asset price deflation and a hard landing. The current turbulence is not so much a credit crunch as an overdue testing of prices and risk assessments. What do you fine folks think of that?”

The 5 Responds:
We’re sure his comments gave great solace to investors in Bear Stearns High-Grade Structured Credit Strategies Enhanced Leverage and High-Grade Structured Credit Strategies funds after the first came up with a value of “zero” and the other $.09 on the dollar.

This talk of V-shape vs. U-shape recovery sounds exactly – we mean verbatim – like the discussions in 2001-2002 following the crash of Nasdaq. Fed response helped ensure that the stock market crash didn’t affect the ‘real’ economy, but it also mutated a stock market bubble into a housing and consumption bubble. And gave birth to the very subprime panic he’s commenting on.

The 2002 “recession that wasn’t” didn’t do what recessions normally do… it didn’t correct the excesses of the boom that preceded it. With the subprime fallout, we’re expecting that barring full-on resuscitation attempts by the Fed, this recession will do the trick, regardless what David Malpass says. If the Fed does begin a rate cutting cycle, the dollar, which as we noted above is already tickling all-time lows, will get sold off with abandon.

“This showed up this afternoon on the wires… finally,”
writes another reader. From Reuters under the headline “U.S. dollar losing luster as reserve currency”:

“Non-industrial countries hold some 30 percent of their reserve assets in euros and 60 percent in dollars (as of December 2006), compared with 19 percent and 70 percent, respectively, six years ago,” the IMF said.

“’Industrial countries’ use of the euro has risen to 21 percent from 17 percent in December 2000, while their dollar holdings have remained fairly steady at 72 percent compared with nearly 73 percent six years earlier,” the IMF said. The balance of their holdings are in other currencies like the Japanese yen or the British pound.”

“So about how long now,” asks our reader “before it’s all around the water coolers, and we’re hearing the shoe shiners saying they’re shorting the dollar? Thanks for being ahead of the curve, once again. I just wish I had the fortitude to trade Forex. Keep up the good work.”

“The Economist’s Kevin Kallaugher and I were freshmen together at Harvard, long ago,”
writes a reader of The 5… who happens to be Outstanding Investment’s Byron King. “Kal was posted on the first floor of Lionel Hall, and I was living on the third floor. I spent many, many hours in his room, chewing beaucoups of fat, with him and his other roomies, one of whom was a fellow-Pittsburgh guy.

“Kal has always been a great and clever illustrator, even when they turned him down for a gig at the Harvard Lampoon. It was the Lampoon’s loss, to be sure. Kal had a clever drawing with a fellow standing against a wall, saying “My insurance company? New England Life, of course.” Then you flipped open a page to see that the guy was lined up in front of a firing squad, about to shoot him. Like I said, very clever.

“After Harvard, Kal wound up killing time in London and reading far too many newspapers. Hence he came to understand the British political scene quite well. When the Economist advertised for a part-time illustrator, he offered a portfolio of British politicians that was quite novel. So they put him on the payroll, where he has remained for some 30 years or so. In the age before Internet and instant, flash communications, Kal used to express-mail his cartoons to London via the Concorde supersonic airplane. Almost always worked, except for this one time…

“At any rate, I’m glad to see that you gave a nice plug to Kal, an old friend.”

Best regards,

Addison Wiggin
The 5 Min. Forecast

P.S. Congratulations to Bill Bonner and Lila Rajiva
– their new book, Mobs, Messiahs and Markets, is officially a New York Times Bestseller. It will debut at #20 on the latest NYT non-fiction list, and after reading the book, we bet this won’t be their last appearance on best-selling lists.

If you haven’t picked up your copy yet, what are you waiting for? Click here to for Mobs, Messiahs, and Markets
– you can even get (an incredibly ironic) deal on Alan Greenspan’s new book when you buy Bill’s.

 

 

 

rspertzel

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