Buffet & Bear Stearns, Dubai in Trouble, Indian Pizza Wars, Worrisome “Safe Havens,” and More!

by Addison Wiggin & Ian Mathias

  • Does your money market account contain subprime debt? Surprising stats on these former “safe haven” funds
  • Buffett on the board of Bear Stearns? It might happen… details below
  • Fog rolling in on Dubai real estate… Evidence confirms our “too good to be true” verdict
  • Brazil showing more signs of a coming bull market… a way to play the trend
  • The coming war in India… over pizza
  • Dan Amoss on GM… Why the new benefits package won’t rescue the automaker’s bottom line
  • “Addison, climb off your soapbox,” says a reader… “Get a life,” responds The 5…

Gold and the dollar. What else is there to say?
Just because Nixon severed the tie between these two 36 years ago doesn’t mean they can escape one another.

Gold futures, December delivery, rose $6.70, to $742.20 an ounce yesterday — nearing all-time highs. The dollar index is still hanging out at 78 — a 15-year low. There is nothing on the horizon that suggests these two currencies won’t continue in their current trends.

See: Gold: The Once And Future Money
and/or The Demise of the Dollar

The euro set another record high versus the dollar yesterday, too.
The Esperanto currency is still worth $1.41. The pound stayed at $2.01, and the yen lost a hair… it’s now at 115.

The Australian dollar traded just short of 88 cents this morning, bringing its weekly gains up to an incredible 5 U.S. cents.
The Aussie currently rests at a two-month high, only a few fractions of a cent away from the 18-year high it reached in July.

“This has been an amazing run for the A$ since the Fed cut rates last week,” recounts our currency counselor Chuck Butler. “And why not? Gold is kicking sand in the dollar’s face… China’s demand for commodities and raw materials that Australia can provide continues to be strong… The data look good… The central bank is playing along… 5 full cents in a week… Amazing!”

Crude oil has endured a fair bit of price movement this week.
The world’s fuel fell as low as $78 early in the week on a surprisingly high inventory update from the Energy Department and Ahmadinejad’s classic idiocy. But crude rallied back to $81 this morning, thanks to this duo:

Meet Karen… she’s about 970 miles east of the Lesser Antilles.
And her pequeno hermano TD 13, who will be named Lorenzo if he grows any bigger.

At present, neither storm poses a threat as significant as its 2007 predecessors. But still… traders have begun to price in a small risk premium. TD 13 will have its greatest impact in the next few days, while Karen won’t be near significant coasts until around this time next week… if at all.

Markets rallied yesterday, averaging about 0.6% gains.
Thus, the Dow and S&P 500 are only about 2% off their all-time highs.

American money market funds may contain up to $11 billion in subprime CDOs,
reports Bloomberg this morning. MMFs are historically known as safe havens for investors — funds that are supposed to be investing in T-bills, CDs and high-grade short-term debt.

However, some of the biggest money market funds — like those of Bank of America, Credit Suisse, Fidelity and Morgan Stanley — held more than $6 billion of CDOs with subprime baggage in June. The SEC actually requires such funds to invest in securites with “minimal credit risks.” One of many SEC guidelines, we suspect, not strictly enforced.

While this $2.5 trillion industry probably won’t tumble to the ground, it’s interesting this year to watch former sure-thing investments like MMFs and bonds turn to garbage. Could your fund be exposed?

We were wondering when and if Buffett was going to move in on the subprime garage sale. Now we have an answer: He was first in line.

Bear Stearns, the first of the big banks to come clean about their subprime exposure, is reportedly ready to sell up to 20% of its own stock.
Buffett is rumored to be a top bidder for this huge minority stake. Neither B.S. or Buffett was willing to comment on the matter this morning, but B.S. stock has skyrocketed 12% on the thought of a Berkshire acquisition.

Will it happen? Who knows. Bank of America, Wachovia and two Chinese banks are also in talks with B.S. Buffett is known to dodge bidding wars for acquisitions. Thus, the more attention this deal gets, the less likely it seems.

On the other hand, Buffett and Bear Stearns CEO James Cayne are longtime bridge partners. He may have already forced B.S. to go to slam.

The Dubai real estate boom is finally showing signs of weakness.
About 50,000 housing units under construction are currently being delayed by material and labor shortages, reports the FT this morning. Regional investment bank EFG-Hermes consequentially predicted less than half of these homes will hit the market this year.

The fog rolling in on Dubai real estate… symbolism in living color

EFG-Hermes expects continued property price growth — up to 25% until 2008 — followed by at least a 15% correction by 2011. We’ve said it before… growth in this region is just too amazing to be true. Sooner or later, it will have to come back to earth. When we visit it firsthand next month
, we’ll be sure to give you our take.

Brazil’s economy expanded at the fastest pace in three years last quarter.

Brazilian GDP climbed 5.4% in Q2 from a year earlier. We’re guessing this has to do with the Brazilian central bank’s 18 rate cuts since 2005. With a current rate of 11.25%, never in Brazil’s history has it been so cheap to borrow cash.

“Brazil is on a hot streak,” says Free Market Investor’s Christopher Hancock. “Average monthly wages have risen 7.2% from 2005-2006, and economists say the increase this year will be even bigger. This means consumer spending should continue to rise.”

Consumer spending increased over 5% in the last quarter — the 15th consecutive quarterly rise.

“I see the real growth in housing. There’s a significant shortage, and interest rates are on the way down. If they get the investment-grade nod, look for the sovereign wealth funds to move there, as well.”

Chris told us he still “loves” the Brazilian paper play he recommended back in June. Free Market readers have already enjoyed 20% gains on the stock, but it’s barely above his buy-up-to price. Click here for more.

Consumer culture is alive and flourishing in India, too.
One news item this morning cites a turf battle brewing between Domino’s and Pizza Hut for dominance in the Indian pizza market. “Apart from local adulteration practices — plenty of chili flakes, ketchup and other condiments,” comments Fortune magazine, “these pizzas at Domino’s and Pizza Hut taste the same as in the U.S. What’s different is the intensity of the competition. Pizza Hut has 134 locations across India (and 13,000 worldwide); Domino’s, 149 (8,500). Both are adding about 50 stores a year — quadruple the average in other markets.”

Too bad the pizza tastes the same as in the U.S. Chris Mayer and I will be in India early in October. We’ll be sure to avoid those stores just like we do here in the States.

Microsoft’s Halo 3 — a video game for Xbox 360 — made more than $170 million in its first 24 hours on shelves on Tuesday.

Coupled with still un-tallied international sales, Halo 3’s launch will most likely rank as the most profitable first-day entertainment phenomenon ever. For comparison, it took Spider-Man 3 — the highest grossing movie of all time — an entire weekend to make $151 million.

Goldman Sachs recently forecasted Halo 3 sales to nearly quadruple this mark by the end of the month.

General Motors stock is strong today on news that management successfully negotiated with the UAW to set up a Voluntary Employees Beneficiary Association (VEBA) trust fund.

“The agreement is being hailed as a coup for management and shareholders,” says Dan Amoss of Strategic Investment. “It will reduce GM’s exposure to a massive health care liability that had been growing in size by double digits every year. But what will be the true cost?

“The media is ignoring how the VEBA will be financed. New debt will certainly add to the existing $700 million in interest expense GM must pay to creditors each quarter. New equity will dilute existing shareholders. GM is also facing a weakening economy and high gasoline prices — a nasty combination for a company whose profits are tied to the fortunes of truck and SUV sales.

“Also, the credit market turmoil and the unfolding housing-led recession will both weigh heavily on industrywide auto sales. The 0% financing deals won’t come to the rescue as they did in the 2001 recession. Auto shoppers have become conditioned to expect them. Avoid GM stock.”

“Addison: Please climb off your soapbox,”
writes a reader. “It is quite apparent that you have never worked in an automotive factory. The current UAW member is considered to be a middle-class wage earner by today’s standards. I dare say you are more than making $70 per hour by e-mailing your newsletter to the masses. I am currently a UAW member and while I don’t condone all their political ideals, I do appreciate the benefits that collective bargaining garners.

“What a typical one-sided view toward a UAW contract,” opined another. “You would probably scoff at a $70 per hour job. Let’s see you make it on their wages for the rest of your life. What is it with Republican egos that think that a person of average qualities can’t make more than minimum wage?”

The 5 responds:
We’re all for people of average qualities making minimum wage. But… who are you callin’ a Republican?

“I love your 5 publication. But one thing keeps driving me nuts.
You mention no one is balking at a North American union, as if it were a foregone conclusion that the rest of North America is salivating to join the USA. Many Mexicans clearly are, but it may come as a shock to many Americans that the idea of politically uniting with our American friends anything past the economic and historic ties we already share is distasteful to most Canadians. No one is discussing such a topic up here. The concept simply does not exist — a stark contrast to the free trade and NAFTA debates, which were argued ad nauseum in Parliament and every Tim Hortons coffee shop coast to coast.

“That aside, the real question is why would we want to join at this time? You say American house prices are down almost 5% over last year. Here in Alberta, we face the opposite absurdity, with house prices rising over 35% in the same period — adding 100% over three years. Add to that the loonie strengthening, or the greenback sinking. Does anyone seriously believe now is the time we Canadians and Mexicans would want to grab onto the anchor chain, just after the economic and political leaders of the U.S. have thrown the anchor of debt tied to the greenback overboard?

“For a long time, no one has accused our Canadian political leaders of being the brightest and best, but even our fools are not stupid enough to seriously discuss such an idea. Keep up the great work on The 5!”

Again, The 5:
We think you’d be crazy to form a union with the U.S., too. And we said as much when we published the cover of your Maclean’s featuring George W. Bush as the next Saddam Hussein.

“I did a double take when I saw how much money single white females were throwing into investments,”
says a reader, “and then realized that wasn’t the acronym you intended.”

The 5 responds:
No, we were referring to sovereign wealth funds. But if you know any single white females with over $2.6 trillion to invest, have them contact Ian immediately.


Addison Wiggin
The 5 Min. Forecast


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