Retail Results, Merrill Gets a SWF Bailout, 2008 Forecasts, and More!

by Addison Wiggin & Ian Mathias

  • Did the consumer save Christmas? The first glimpse into the holiday retail results
  • Another U.S. bank bailed out by a foreign wealth fund…
  • Dollar ends recent rally… a 2008 greenback hedge worth considering
  • Byron King on an oil trend to “watch like a hawk” in the new year
  • Plus… how much would you pay for the rights of man?

The 2007 holiday buying season was a flop…sort of. Spending from Thanksgiving to Dec. 24 rose 3.6% from last year… but that’s the slowest growth rate in four years.

According to a MasterCard study released today, spending growth was nearly halved from 2006’s 6.6% rise and was far below the 8.7% growth in 2005. Over 1.2% of this year’s “holiday” MasterCard purchasing growth was spent on gasoline.

Americans were at least 30 days late on over $17.3 billion in credit card payments in October — up 26% from the same time the year before. Likewise, the total funds in default rose to nearly $961 million, an 18% increase year over year.

Merrill Lynch grabbed the biggest financial headlines while you enjoyed your yuletide festivities. The bank, like many before it, announced it needed a multibillion-dollar bailout to stay afloat, and consequentially scrambled abroad for SWF capital.

The bank announced it would raise over $6 billion in the near future, $4.4 billion of which will come from the Singaporean sovereign wealth fund Temasek.

Ironically, we were surprised to hear the remaining funds were originated on American soil. U.S. firm Davis Selected Advisors will snatch up $1.2 billion of Merrill common stock, while Outstanding Investments pick GE has agreed to buy most of Merrill’s commercial finance biz, Merrill Lynch Capital.

If you haven’t checked out our report on SWFs and your retirement , it’s worth a read.

“The U.S. banks have abandoned their ‘Super-SIV’ plan to create an artificial market for each other’s nontradable mortgage-backed securities,” observes our colleague Dan Denning from his perch in Melbourne, Australia.

“Apparently, it is a lot easier to borrow several billion dollars from a sovereign wealth fund and sell equity in your firm, instead.

“Existing shareholders are already sitting on falling share prices. Now they face dilution in their shares. The upside? The banks get recapitalized, rather than being dismembered and sold off piece by piece to the highest bidder.”

Still, the news from Merrill began a holiday buying spree on Friday that has yet to stop.

This morning, the Dow and S&P 500 were up over 2% since we wrote to you on Friday.

The dollar didn’t fare so well. The index fell over the weekend, from 77.7 to 77.2.

The greenback’s sudden stumble came at the hands of the euro, which rallied from $1.43 on Sunday to just short of $1.45 this morning. As EverBank’s Chris Gaffney warned on Friday, the pound remained the ugly duckling of the currency world, falling to four-month lows versus the dollar, at $1.98.

The yen weakened against the dollar, too… it’s back down to 114 this morning.

The Indian rupee has been tightening an already remarkable grip on its 2007 gains. Unfazed by the global credit crisis, India’s currency looks as if it will party into the new year, with over 12% gains versus the dollar this year:

Since we’re in the business, we’ll forecast an even stronger run for the rupee in ’08.

Here’s a dollar hedge that may prove useful in 2008. Or, well, at least… it worked brilliantly in 2007… invest in Canada with American dollars.

In 2007, as in many other years, Canada’s S&P/TSX Composite was caught in almost lock step with the S&P 500. Had you invested in the TSX with Canadian dollars, you’d be up about 5%. But the EWC, an ETF that tracks Canadian growth almost exactly as the TSX, gained as much as 40% this year. Why? Greenbacks…

By buying a Canadian tracking ETF with U.S. dollars, any EWC investor benefited from both currency appreciation and Canadian growth. Such compound ETF appreciation worked similarly in other growing markets where the dollar sank, such as Australia. Likewise, any poor Canadian sap lured into buying U.S. benchmarks with loonies took a loss in 2007.

On Christmas, Turkey bombed northern Iraq again. The act sent oil back up to $94. That and this…

A Conoco Phillips pipeline sprung a leak in Alaska’s North Slope last week.

“Thankfully, it was small — 102 barrels — and quickly contained,” reports our oil correspondent Byron King. “The leak did not interrupt overall North Slope extraction or delay the flow of oil through the Trans-Alaska Pipeline. But it is the way that the leak occurred that is disconcerting.

“Apparently, rust formed on the outside of a gathering pipeline that serves the Kuparuk field. The initial corrosion occurred beneath an outer layer of insulation, so it was not visible to external inspection. But neither could the rust be detected via internal inspection (known as ‘pigging’ — don’t ask). Eventually, the pressure within the pipeline burst through the area weakened by rust. Oil sprayed out, soaked into the adjacent snow and was blown some distance by the howling winds.”

Much of the world’s oil infrastructure is decades old and long past its design life.

“The world’s oil supply and demand are balanced on a knife’s edge,” says Byron. “If some larger issue — a larger leak or the failure of an offshore platform — arises and takes down any significant amount of oil output, prices could easily spike on world markets.

“You have to watch the world’s oil patch like a hawk.”

Luckily for you, Byron’s doing just that. We expect you’ll be hearing a lot about the world’s infrastructure — oil, water, energy, transportation — in the new year. Each of our Agora Financial editors has identified critical areas in delivering the resources necessary to maintain the world’s population in the manner to which it’s become accustomed. For our most comprehensive, and least expensive, way to capitalize on the gains we expect to make in 2008 and beyond, see our limited Agora Financial Reserve offer.

Lastly, perhaps the most important document ever to be auctioned was sold last week. One of the 17 known copies of the Magna Carta was sold by Sotheby’s last Tuesday for over $21 million. The 800-year-old script, the cornerstone of rule by constitutional law, was sold to David Rubenstein, co-founder of the controversial private equity firm the Carlyle Group.

What $21 million will fetch you these days…

Rubenstein has already agreed to loan the document to the U.S. National Archives, and thus, the one American-owned copy of the Magna Carta will remain in the U.S.

As if this transaction weren’t quite strange enough already… the seller of the Magna Carta? Ross Perot.

“After reading your discussion about SWFs investing in U.S./European banks,” writes a reader, “I wonder if their investments give them access to depositor information. I know what your response will be, but I will still wonder. Maybe the U.S. government should print a few more greenbacks and invest in some Chinese, Indian and/or Russian banks.”

The 5 responds: No doubt they’ll be printing greenbacks in 2008. Whether the Russians or Indians will still want them… well, that’s another question.

“With regards to the farmer who wrote in saying that hydrogen was the only viable alternative energy source for transportation,” writes a reader, “I respectfully inquire if he has ever heard of the Hindenburg.

“I don’t believe that the widespread use of hydrogen will ever happen because, unlike gasoline and diesel (Hollywood pyrotechnics notwithstanding), it is not flammable; it is explosive. The danger will be apparent well before any crazy scheme to roll out nationwide hydrogen-fueled cars gets anywhere. I, for one, wouldn’t be caught dead in a hydrogen-powered vehicle. Or should I say, I would be caught dead. Oh well, you catch my drift.”

The 5 responds: We’re willing to bet the technology has improved a little since 1937. In fact, we’re going to sic our small-cap technology guru on the case early in ’08. Thanks for the skeptical tip.

“Fed rates may be lower,” writes another, “but not mortgage rates. In fact, I am facing a situation that is potentially very bothersome for our national economy.

“I am purchasing a high-rise condo on the Strip in Vegas (I know, you already think I am stupid!). However, I am part of the development team, and my purchase price is below current replacement cost… plus, I will be living there for a while, so I am not worried about it (too much).

“However, I am seeking a purchase loan from Washington Mutual (WAMU), a portfolio product that won’t be sold on the secondary market. When I first applied in August, the rate was 6.625%. Since August, T-note rates have dropped quite a bit (about 100 basis points?), while today, the interest rate on the ‘approved’ loan is 8%. That is a big problem.

“Obviously, WAMU and most other financial institutions are losing their shirts right now, and they all want to make some money by increasing the spreads to their best customers. If this is happening to me, with a credit score of 770, it is happening to everyone. I think we have a big problem ahead of us.”

The 5 responds: This is another trend that’s sure to get worse before it gets better. ARM resets, the principal villains behind the tightening of the credit market, don’t peak until late February, two months hence. Most major players in the mortgage industry are bracing for a tougher year in ’08 than the carnage we saw over the past six months.

Hope you had a Merry Christmas,

Addison Wiggin
The 5 Min. Forecast

How currency appreciation compounds the returns on foreign equities for U.S. investors
Magna Carta sold for 21.3 million at New York auction
Kuparuk pipeline leak spills oil-water mixture


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