Dow Sets Record, More on Citi, Uranium Update, A Rare Metal Play, Aussie Parity, and More!

by Addison Wiggin & Ian Mathias

  • Dow soars to intraday high… were you “herded” into this boom? The Fed’s got you right where they want you…
  • Why Citi’s bad news is even worse than you’ve heard
  • Bankers getting cold feet over funky debt deals? Mayer weighs in…
  • Gulf states ready to nix the dollar… and the surprising currency set to reach parity with the greenback
  • Bottom falling out of the uranium market… boom gone bust, or buying opportunity?
  • Metal mania! After taking profits on gold, Kerr picks a metal you’ve probably never even heard of

The Dow surged 210 points in the last hour of trading yesterday, pushing the index to an intraday record of 14,111.

“Investors shrugged off a profit warning from Citigroup and instead focused on the possibility of more Fed rate cuts,” reads the first sentence of CNN’s report. Oh boy… that’s bad. The rates are being cut for a reason. And it’s not because Bernanke wants your 401(k) to return 20% this year.

Dare we remind you: The Fed’s last rate-cutting spree began with a surprise cut on Jan. 3, 2001. The next day, stocks surged, just as they did last month. By the end of January, the buzz wore off and the Fed cut by 50 bps again… and stocks surged yet again. Less than two months later, the Dow lost 10%.

Both the Dow and S&P 500 gained about 1.3% in yesterday’s trading.

“One must be cognizant of herding behavior,”
comments Mish Shedlock. “Nearly everyone is thinking exactly as the Fed wants. Aim high. Shoot for the moon. Do or die. You are losing money by saving. Buy assets. Only fools save. In the long term, stocks always go up.

“The problem is that aiming high is synonymous with increasing risk. Up till now, risk taking has been rewarded.

“But what happens when everyone does the same thing? More to the point, what happens when everyone does the same thing for 20 years or longer? Eventually, risk gets so unappreciated that various asset classes go to the moon. Consider real estate. About a year ago, the mantra was that real estate always goes up. There will never be a national housing decline, because all real estate is local.

“There is an amazing belief in the Fed’s ability right now to control the business cycle, as well as price stability. It’s not warranted. At this stage of the cycle in a slowing economy, with rampant overcapacity, a tenuous job climate, and no real reason for businesses to expand, the odds are that aiming high is precisely the wrong thing to do.”

And the announcement from Citigroup — which investors failed to accept — turned out to be even more perilous after close consideration.

“The most troubling part of this preannouncement,” writes Dan Amoss, steward of the Strategic Investment portfolio, “is the $2.6 billion increase in credit costs in Citi’s Global Consumer business. Of this figure, about $1.95 billion is an increase in Citi’s loan loss reserves. The loan loss reserve account is a bank’s estimate of the losses it expects to take. This $1.95 billion increase represents a whopping 19% of Citi’s existing loan loss reserve.

“To put this figure into perspective, during the first and second quarters of 2007, Citi added just $646 million and $545 million, respectively, to its loan loss reserve account. This is a clear message from Citi that the credit quality of its loans is deteriorating much faster than expected.”

“The fallout from the July-August credit bust will have many ripple effects,”
comments Chris Mayer. “Borrowing money just got a little harder. Hard enough to quash the great buyout boom.”

Take a look at this chart published in The Economist:

The last few years have seen unprecedented record-breaking deals, many dependent on debt financing. “Now bankers and dealmakers are getting cold feet,” says Chris. “There is a diminished appetite for funky debt deals. Mergers and acquisitions never go away entirely. They are part of the lifeblood of the market. But the total volume and size of these deals definitely has its own ebb and flow through time. The latest surge in activity is coming to a close.”

Still, Wall Street’s record close yesterday helped push gold off a cliff.
After flirting with a recent high $748 yesterday, gold got sold like a paparazzo’s bikini shot of Jessica Alba all the way down to $730 this morning.

And the dollar? Well, it refused to go quietly into that good night yesterday.
It rallied… slightly. The dollar index pulled itself off the mat and staggered back to the 78-range. This morning, the euro barely clings to $1.42. Overnight, the pound fell a cent to $2.03. The yen is back to 115.

“Over here in the Middle East,”
writes our Rude editor Joel Bowman, who recently set up camp in Dubai, “where they have a surplus of dollars and a good deal of the world’s remaining oil and gas supplies, speculation is growing over whether GCC countries will follow Kuwait’s lead and decouple from the once-almighty buck. “

Kuwait, the third largest Arab oil producer, was first to drop the dollar back in May when it announced it would drop its dollar pegging in an effort to control its “inflation importing.” The Kuwaiti dinar now aligns itself with a basket of currencies, including the pound and the euro.

“Rampant speculation that the Gulf states are looking to revalue their currencies,” reports Arabian Business, “has pushed [UAE] dirham bids to a five-year high over recent days.”

The riyal, Saudi Arabia’s currency, is the strongest it’s been since 1986. Joel has promised to keep us up to speed on GCC developments…

The Canadian dollar, on the other hand, shows little sign of weakness.
The loonie hit a new 31-year high yesterday at a $1.009. “The Canadian dollar has set the standard for commodity based currencies,” Chris Gaffney of EverBank tells us.

But perhaps not for long.

The Aussie dollar looks to be the next currency to challenge the U.S. dollar with parity.

“Fundamentals suggest the Aussie dollar will continue to rise in 2008,” Mr. Gaffney continues. “The economy is expected to expand by more than 4% next year, and inflation will accelerate. Overseas shipments of raw materials, which contribute about 14% to Australia’s economy, helped drive 4.3% growth in the second quarter from a year earlier, the biggest increase in three years.”

A technical analyst at Goldman Sachs suggests a close above the resistance level 89.25 would set the Australian dollar free to reach parity. But crazy as it sounds, that’s not uncharted territory either. The Australian dollar reached $1.20 back in 1981.

The Aussie buck traded at 88 cents this morning. Another 13% move to parity isn’t out of the question.

U.S. manufacturing grew last month at its slowest pace since March.
In August, the Institute for Supply Management’s index of national factory activity fell for the third month in a row. The score of 52 was very slightly below analyst expectations. A score of 50 would signal the end of manufacturing expansion. We expect that just in time for Christmas.

“After an unprecedented price run,” reports Greg Guenthner, “one-time buyers are dumping their uranium positions as the gray matter finally begins to correct.
While these fly-by-night speculators are running scared, we are presented with a clear buying opportunity.”

Uranium prices dropped as low as $85 this morning, $10 shy of this year’s lows.

“Even with 500-some companies competing to provide the uranium needed to start up this new wave of nuclear plants coming online,” Gunner writes, “the demand is only going to push the price of uranium through the roof — again.

“If history is any indication, it will be the small companies that take advantage of this second run. It will be a lot easier for these companies to double or triple in size, which will give shareholders the chance to see huge profits.”

Gunner insists you be careful when scouting for your small-cap uranium pick. You should seek companies with plenty of high-grade reserves, good location and partnerships with established majors. Gunner just added one such uranium play to the Bulletin Board Elite portfolio… click here for more.

Our Maniac Trader has gone gaga for tantalum.
Tanta-what? Yeah, that’s right.

“Tantalum’s big claim to fame in the metals world is that it’s used in the production of capacitors,” explains Kevin Kerr, “which are important components in the manufacturing of mobile phones, laptops, PDAs, game devices, digital cameras and everything that makes the big world a little smaller.

“The growing demand for these products is why I believe the level of consumption of tantalum is going to exceed current industrial commodities like copper (construction, electronics), lead (car batteries), zinc (galvanized steel), etc.


Looks like coal, but it’s oh so much more… tantalum

“Many of the base metals have already had incredible increases in prices and are likely to continue to climb, just not as fast as things like tantalum, which is still fairly under the radar. Like all the industrial metals, tantalum may suffer a slump during an economic slowdown, but it is likely to snap back faster than any other, and supplies will be absorbed quickly.

“From a trading perspective, tantalum is strongly tied to market fundamentals because it’s difficult for speculators to take large paper positions; hence, the speculation is done by traders taking physical positions, not financial institutions trading derivatives. It’s the real deal.” If you want to learn more about tantalum, you’ll find Kevin’s trade in this month’s Outstanding Investments. If you’re not yet a subscriber, we can help you with that here.

“You should stick to financial reporting,”
writes a reader. “It is one thing to disagree, but you do not have to be disagreeable! Nobody gives a damn what you think about politics. As for the Rubik’s Cube… have you never tried to solve it yourself?

“It was another example of picking and choosing pictures and statements that have no place in a financial service. It is another example of your own political agenda! I suspect it has cost you and will continue to cost you and your writers many subscribers!

“That alone makes it a stupid thing to do.”

The 5 responds:
C’mon now. The picture is funny. Even your stiff derriere has to admit that much:

As for a political agenda, we only have one: Sauve qui peut.

“Gentlemen,” says another, “I love The 5 Min. Forecast! It brings a sense of real humor that is sooo lacking in this world.
I assure you that if I disagree with something you write about, you won’t hear bellyaching from our neighborhood.

“After all, it is your site/opinion, and you paid for it. If customers don’t like it, I’m sure they can cancel at anytime! Please keep the insights, humor, dry sarcasm and wit coming… I love to laugh!”

“First, I would like to tell you,” writes yet another, “that I look forward to returning from lunch and reading The 5. My real concern/question is this: The more bad news that is released regarding earnings and the economy in general, the more the stock market seems to keep rising.
I know that people get excited by the bad news and anticipate further interest rate cuts and therefore continue to dive into the market.

“But will it ever end? Will the market have another correction as I am expecting? I sold my stocks and reinvested in gold and commodities with one-third in cash waiting for the next correction so that I can buy at a discount some of my favorite stocks for the long term. But by selling, I have missed out on some nice returns due to the recent run. I look at the stock market as a house of cards that should come down, but that doesn’t necessarily mean it will.

“Your thoughts?”

The 5 responds:
The economist John Maynard Keynes, who both made and lost a fortune in the stock market, once famously said, “The market can remain irrational longer than you can remain solvent.”

The stock market is a casino. We expect that house of cards will fall, too. But not one of our analysts is completely out of the market right now… they’re all hedging their bets and letting their winners ride.

Regards,

Addison Wiggin,
The 5 Min. Forecast

rspertzel

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