Scary Fed Choices, All Time Worthless Dollar, Last Decent Real Estate Buys, and More!

The rate cut fever has gripped even the best financial commentators. Bill Gross called for a staggering 1.25% rate cut in his monthly musings yesterday, taking a big honking gulp of Kool-Aid while writing.

“Mortgage write-offs, credit card losses and increasing defaults on small business loans,” explains Gross, “will squeeze bank balance sheets and income statements for the next several years. That pressure in turn will result in more conservative lending practices, which will induce not a contraction in credit growth, but a noticeable slowdown.

“An increasingly recessionary-looking U.S. economy will likely require 1% real short rates and 3.5% fed funds in order to stabilize a potential growth contraction in lending not witnessed since the early 1970s or, to be honest, Roosevelt’s Depressionary 1930s. We can only hope that Bernanke, Paulson and their cohorts recognize the danger.”

Where’s Greenspan when you need ’im, eh? Oh yeah, he wouldn’t be much help in this situation, would he? On his book tour recently, Greenspan told USA Today he doesn’t think Bernanke has the luxury of cutting rates during every global crisis he will face… because if he does, the dollar will burn.

Here’s a bit of evidence supporting Greenspan’s lament: “Commodities and commodity-focused stocks have been soaring ever since Ben Bernanke began cutting interest rates in mid-August,” writes our Eric Fry in the Rude Awakening this morning.

“Since Aug. 17, when Chairman Bernanke kicked off his rate-cutting campaign, the iShares S&P Goldman Sachs Natural Resources ETF has soared 22%, while the BKX Index has slumped 2%. This conspicuous divergence between natural resource stocks (up) and financial stocks (down) suggests that Bernanke’s rate cuts have not produced the desired result.

“The Fed’s rate cuts have succeeded brilliantly in stoking inflation fears, but have failed miserably in healing the financial sector…

“We fully expect the Federal Reserve to continue its failing policy when it meets again today… We’d like to believe that the Fed’s rate cuts will work wonders for the financial sector and for the economy at large — really, we would… we fully expect additional rate cuts that will provide no help whatsoever to the financial sector, but will provide help aplenty to rising commodity prices.”

Check back tomorrow for Fed decision fallout. If there were a gun pointed at Ian’s head right now and we were forced to guess what’s going to happen, this would be it: The Fed will cut 50 points, the stock market will rally big, the dollar will get hammered in overnight trading and gold and oil will both see new highs.

Don’t ask what we’d say if the gun were pointed at my head.

Overnight, currency traders priced in a possible rate cut from the Fed. Translation: It was a bad day for the dollar.

The pound leaped up to $2.07, a new 26-year high. The euro climbed higher, into the $1.44s — marking its fourth record high in as many days. The Canadian dollar breached $1.05, setting a new high of its own… not since 1960 has the greenback fetched so little in a trade with our neighbors to the north.

The dollar index sunk to 76.6, another all-time low.

The dollar fell to $793 against gold last night, too. Right now, however, it will take you US$785 to buy one ounce of the yellow stuff.

“If you think the U.S. dollar’s losing ground against gold, just take a look at what’s happening to sterling,” writes Adrian Ash from the U.K.:

Across the pond, an ounce of gold will now cost you over 380 pounds — a new all-time high in the gold price for British investors.

“You might not think that’s possible, what with the pound sterling now breaking new quarter-century highs against the dollar above $2.07. You might think it laughable for me to say the pound is weak, given the absurd cost of living here in London. At current exchange rates, a pack of cigarettes cost me nearly $12 this weekend.

“But, gold, meanwhile…dumb, yellow, shiny gold…says the British pound has never been worth less than it is today.”

We reported earlier this week that “consumer sentiment” had reached a 17-month low. Now it looks like “consumer confidence” fell in October more than forecast, too. The Conference Board’s version of the consumer index shrank 4 points, to 95.6, in October, its lowest score in two years.

Professional guessers on Wall Street missed the mark by nearly 4 points. We suspect the housing market may have something to do with the dour response to these respective sentiment surveys…

Sure enough. “At both the national and metro area levels,” Robert Shiller said yesterday upon release of this months S&P/Case-Shiller index, “the fall in home prices is now showing real signs of a slowdown or turnaround.”

According to the index, which sports Bob’s family name, home prices fell 4.4% from August 2006- August 2007. This marks the eighth-straight decline in the index. Note the textbook swan dive:

“There is really no positive news in today’s report…” Shiller concluded.

“It may seem hard to believe given the subprime troubles and the housing bust,” writes Chris Mayer this morning, fresh from his India adventure, “but money is ready to flow into real estate in a big way.”
Just not in the United States.

“Global real estate is hot and India is near the top of the shopping list. For the first nine months of the year, overseas real estate funds raised $2.4 billion. Estimates call for another $1.1 billion before the end of the year. That’s a whopping $3.5 billion slated for real estate investment. According to Tim Friedman of Private Equity Intelligence (Preqin) in The Economic Times: “India is now the third biggest global center for private equity real estate… we predict that $4-6 billion will be raised in 2008 by funds with a specific Indian focus.”

“Real estate prices are too high for my tastes, but I still want a piece of that action.” In his latest issue, Chris provides details on a stock that gives you access to those billions without ever owning the underlying real estate. “It’s the only stock of its kind that I am aware of. Truly a unique opportunity.” Details on subscriptions here.

Citigroup, Bank of America, Wachovia and JP Morgan stand to make out just fine with their $100 billion credit bailout fund.

The four banks could earn some $1.3 billion in management fees on the fund, which has since been given the heady title of Master Liquidity Enhancement Conduit (M-LEC). Sounds like a surgical instrument for constipation patients.

The banks will earn a 1% management fee when structured investment vehicles (SIVs) worth less then $5 billion come to clean their dirty bonds, and 1.5% for those over $15 billion, reports the Financial News. None of the banks have confirmed or denied this report.

“A sleeping giant is awakening,” Greg Guenther tells us, keeping alight the torch of opportunity amidst all the aforementioned gloom. “Thanks to new 3-D seismic technology, deepwater drilling in the Gulf is experiencing a dramatic resurgence.

“The Gulf of Mexico used to be a thriving hub of drilling activity. But only a few years ago, it was declared the ‘Dead Sea.’ Exploration slowed, and many oil industry professionals felt that the region would not be as profitable as it once was.

“But decades after its first oil boom, competition is heating up for prime drilling leases in the Gulf of Mexico. The most recent lease sale in the Gulf topped $2.6 billion, making it the most competitive American lease sale in more than two decades.

“Bids were sky-high, with the average winning bid increasing by 260% over last year.

“With these big new leases come new rigs. New deepwater rigs and drill ships are being build worldwide, many of which for use in the Gulf of Mexico. This newfound demand is helping some small companies realize huge profits and backlogs.” To learn more about these companies, please be sure to subscribe to Gunner’s Bulletin Board Elite investment service.

“I can’t believe you printed this without your comments,” writes a reader, referring to this bit of reader mail from yesterday: “My one question that I always ask the tax proponents is what happens when the rich who pay the vast majority of the taxes finally say, ‘Enough!’ and move to Dubai or Singapore or any other number of tax-friendly countries?”

“Bill Gates and Warren Buffett are wealthy,” today’s reader continues. “I am going to bet that they pay more taxes in one year than most readers (if not all) pay in a lifetime. What are their positions on taxes? I don’t recall either of them threatening to move to Dubai if we don’t eliminate the income tax. In fact, Warren Buffett seems to have an opposite opinion than this reader. I would love to see a list of wealthy American citizens who have moved out of this country to save on their taxes. I tend to believe that is a really short list.

“I think that the comment was really stupid and I would appreciate it (note, I am not telling you what to do), if you are going to print stupid comments, if you consistently tell us that you think the comment is stupid or not. When you criticize only some comments, I am left with the assumption that you endorse those comments you did not criticize.”

The 5 Responds:
Hmmn… where to begin.

Warren Buffett does appear to share your opinion. In fact, ironically, last night on NBC news, he was lamenting the fact his $52 billion net worth was taxed about 17% last year. “There isn’t anyone in the [Berkshire Hathaway] office,” Buffett said “from the receptionist up, who paid as low a tax rate and I have no tax planning; I don’t have an accountant or use tax shelters. I just follow what the U.S. Congress tells me to do.”

“In theory, a progressive consumption tax makes the most sense,” concluded Buffett. He advocates an altered sales tax that emphasizes extra high taxes on luxury items.

We’re not sure what part of the reader’s response you thought was stupid. But in this case, we agree with Buffett… and the reader. Buffett’s progressive tax on consumption might even reintroduce (gasp, horror of horrors) “savings” into the national vocabulary. And we agree with the reader that a tax on income is backward-thinking — “immoral,” I believe he said — if we’re trying to promote a highly productive, high-savings society. Why tax people on income, and not consumption?

In any case, the tax system does appear to impact those who are doing well but don’t have $52 billion to their name. Just because you don’t know any of them doesn’t mean they don’t exist. They’re the folks seeking their own personal Galt’s Gulch.

“Here, here!” writes another reader who might fall into this second category. “I’m in the top 25% of wage earners that pays 85% of all income tax.”

“My wife and I worked long and hard to get there, took lots of risk and lost our shirts a few times. We’re at the point at which it isn’t making much sense to work hard anymore, because so much gets thrown down a rat hole in taxes. We’re choking on taxes, and now they want to raise our taxes again.

“We’re at the point of simply taking our capital and fleeing the tyranny to some country where it’s welcome, rather than staying in the U.S., where achievement is increasingly punished. We already know of people who have left for these very reasons and others that are planning to do so, regardless of who gets elected.”

The 5:
(The reader, it’s worth noting, cites our sister publication International Living, with unearthing “quite a few good places to live that fit the bill.” And to be fair, we assume this gentleman would stick it out if Ron Paul were, by some chance, to get elected.)

As for your assumption that we endorse every opinion we publish… well, we published yours, didn’t we? We include reader mail as a way to give our readers a voice. By doing so, other readers are granted what we hope is food for thought… ammunition in the war on ignorance, to use the popular metaphor of the day. God forbid you read several sides of the same story and arrive at your own conclusion. If you want someone to hold your hand and make up your mind for you every day, try Fox News… they’re “fair” and “balanced,” we hear.

Cheers,

Addison Wiggin
The 5 Min. Forecast

P.S. “Options Hotline readers have gained over 313% in just two months on their Newmont Mining calls,” writes an excited Steve Sarnoff to The 5 this morning. Those readers who were able to fill their Newmont positions quadrupled their money in less than a quarter… pretty amazing. Click here to learn more about Steve’s legendary options trading system.